Duration for futures calculation. modify, choice, assets, average, multiple

adehbone

Portfolio consists of 200MM in assets with duration of 6 and 100MM in liabilities with 1 duration. Equity duration thus 11.

Question asks to modify duration to 4.

Formula used is (4 - 6)(200M) / (Futures Information on Bottom Which I Can't Remember).

Why not use 4 - 5.5 (net average asset duration when considering 100MM liabilities with 1 year duration). Hedging with duration of 6 would overhedge portfolio and cause portfolio duration to be <4. Question was multiple choice so I did get it right by the entire question is poor from a theory basis.

100MM in assets has a 6 duration, while the remaining 100MM is net 5. Invested in assets with 6 duration but having liability of 1 year liability attached to assets decreases duration to 5 or 5.25 if you use the 75& rule.



Edited 2 time(s). Last edit at Tuesday, May 17, 2011 at 10:14AM by Paraguay.