A portfolio manager wishes to hedge a bond with a par value of $20 million by selling Treasury…

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A portfolio manager wishes to hedge a bond with a par value of $20 million by selling Treasury bond futures. Suppose that (1) the conversion factor for the cheapest-to-deliver issue is 0.91, (2) the price value of a basis point of the cheapest-to deliver issue at the settlement date is 0.06895, and (3) the price value of a basis point of the bond to be hedged is 0.05954.

a. What is the hedge ratio?

b. How many Treasury bond futures contracts should be sold to hedge the bond?

 

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