1 THE TOTAL VALUE OF THE PORTFOLIO IS ¥55.0 BILLION, AND THE...

Section 4.1

The total value of the portfolio is ¥55.0 billion, and the 40% target allocation to bonds

would be ¥22.0 billion, but the current allocation is ¥27.5, or ¥5.5 billion more. In order

to correct this discrepancy, the equivalent of ¥5.5 billion in bonds with a duration of

4.75 must be sold using bond futures and then converted to equity exposure with a 1.15

beta using stock futures. The number of bond futures contracts to be sold (shorted) is

where MDUR

T

is the target modified duration (0.25 for cash), MDUR

B

is the current

bond portfolio duration (4.75), MDUR

f

is the modified duration of the futures contract

(6.90), B is the value of the bonds being converted to cash (¥5.5 billion), and f

B

is the

price of one bond futures contract (¥4,830,000). Therefore, the number of contacts is;

or sell 743 bond contacts.

2.) The number of Nikkei 225 Index futures Sato must buy to rebalance the Tsushima

pension fund to its target allocation is closest to:

A. 4,148.

B. 3,293.

C. 3,950.

Answer = C

“Risk Management Applications of Forward and Futures Strategies,” Don M. Chance