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Investment Analysis and Portfolio Management

June Klein, CFA manages a $100 million U.S. government bond portfolio for an institution. She anticipates a small parallel shift in the yield curve and wants to fully hedge the portfoio against any such change.

a. The original portfolio
b. The treasury bond futures position
c. The newly hedge portfolio

c. Determine how each of the following would change in value if interest rates increase by 10 basis points as anticipated. Show all calculations.

d. State three reasons why Klein's hedging strategy might not fully protect the portfolio against interest rate risk.

e. Describe a zero-duration hedging strategy using only the governmental bond portfolio and options on U.S. Treasury bond futures contracts. No calculations required.

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