Assume that you manage a bond portfolio. The dollar duration of the portfolio is -6710000. An instrument is traded with dollar duration equal to -1342. To make the portfolio duration neutral you need to:
A) Buy 1342 units of the hedging instrument
B) Short sell 5000 units of the hedging instrument
C) Short sell 1342 units of the hedging instrument
D) Buy 5000 units of the hedging instrument
Duration hedging is a risk management technique that is used to minimize or eliminate the interest rate risk associated with a portfolio. This is done by pooling assets together into a portfolio such that the overall duration of the portfolio is close to zero.
Answer and Explanation:
The answer is B).
To be duration neutral, the overall dollar duration of the portfolio must be zero. Suppose you buy N units of the hedging...
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fromChapter 3 / Lesson 6
Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.