Question

A manager is holding a $4.0 million bond portfolio with a modified duration of eight years. She would like to hedge the risk of the portfolio by short-selling Treasury bonds. The modified duration of T-bonds is 10 years. How many dollars' worth of T-bonds should she sell to minimize the risk of her position

Answer 1

$3,200,000

Step-by-step explanation:

Duration of bond portfolio (Dp) = 8

Value of bond portfolio (Vp) = 4,000,000

Duration of bonds (Df) = 10

T-bonds to be sold = Dp * Vp / Df

T-bonds to be sold = 8 * 4,000,000 / 10

T-bonds to be sold = $3,200,000