Vignette: Holly Elle manages a large pension fund that holds a significant position in U.S. government bonds. Holly has just obtained the firm's projections for interest rates over the next three months. The projection calls for a large unexpected drop in interest rates. Holly would like to take advantage of this drop in rates by increasing the duration of the bond allocation of the portfolio.
Holly plans on increasing the modified duration on $100 million of bonds from 6.54 to 7.68. The appropriate T-bond futures contract is priced at $94,500 and has an implied modified duration of 8.22. The yield on the bond portfolio is 6% more volatile than the implied yield on the futures. After Holly increases the bond portfolio's modified duration with futures, the implied yield on the futures decreased by 40 basis points and the futures price increased to $97,000. The yield on the bond portfolio decreased by 45 basis points, and the portfolio value has increased by $3,450,000.
Question: What is the profit on the futures contracts?
Select an Answer: $387,500 $321,452 $1,250,000 $3,837,500
Rationale:
Profit on the futures contract = Number of futures contract(New futures price − Old futures price)
= 155(97,000 − 94,500)
= $387,500
2026-06-09
Vignette: Tracey Lam has been assigned the task of determining the implications of rebalancing the investment portfolios for the firm's taxable investors. The following is a question that Tracey must deal with in order to properly determine the effects of asset rebalancing in a portfolio context.
Question: Which of the following would be correct if an investor used standard deviation as the method of determining when rebalancing should be initiated?
Select an Answer: If standard deviation is used as the indicator of initiating rebalancing then different percentage movements would be applied to different asset classes. If standard deviation is used as the indicator of initiating rebalancing then the percentage movements applied to different asset classes would be irrelevant. If standard deviation is used as the indicator of initiating rebalancing then the percentage movements applied to different asset classes would be unknown. If standard deviation is used as the indicator of initiating rebalancing then the same percentage movements would be applied to different asset classes.
Rationale:
If standard deviation is used as the indicator of initiating rebalancing then different percentage movements would be applied to different asset classes. This is due to the fact that each asset classes movement of one standard deviation represents different movements in percentage terms of the assets. Once a standard deviation has been decided upon for an asset class then the percentage movement for each asset class is converted from the standard deviation.
2026-06-08
Vignette: Tyler Alout is employed in the risk management division of X securities. Tyler's job is to assist and execute strategies involving forwards and futures in order to reduce or take on risk for the firm's portfolio managers. The following are situations in which Tyler has been involved.
Question: X securities has a client YY Inc. that wants to borrow $10 million on June 1st, which is 30 days from now. The loan will be repaid 180 days later on November 27th at LIBOR + 150 basis points.
X economists are predicting rising interest rates over the period and recommend using a forward rate agreement (FRA). The quoted rate on the FRA is 5.50%. Libor is currently 5.75%.
Which of the following is correct?
Select an Answer: When rates are below the FRA rate of 5.5%, the amount that YY must borrow increases but the amount is borrowed at a higher rate. When rates are below the FRA rate of 5.5%, the amount that YY must borrow decreases but the amount is borrowed at a lower rate. When rates are below the FRA rate of 5.5%, the amount that YY must borrow decreases but the amount is borrowed at a higher rate. When rates are below the FRA rate of 5.5%, the amount that YY must borrow increases but the amount is borrowed at a lower rate.
Rationale:
When rates are below the FRA rate of 5.5%, the amount that YY must borrow increases but the amount is borrowed at a lower rate. The effective rate of the loan remains approximately 7% regardless of the direction of interest rates as the amount borrowed changes. The amount repaid remains relatively constant.
2026-06-07
Vignette: Tracey Lam has been assigned the task of determining the implications of rebalancing the investment portfolios for the firm's taxable investors. The following is a question that Tracey must deal with in order to properly determine the effects of asset rebalancing in a portfolio context.
Question: Determining when an asset class has moved too much and what step to take to counter the move is not always obvious. Which of the following is the easiest to reconcile with rebalancing?
Select an Answer: auto correlation regression mean reverting random walks
Rationale:
Random walks are the easiest to reconcile with rebalancing. Price movements are simple random and independent of one another. Past movements contain no information relevant to future movements. Rebalancing is an exercise in the control of the risk return profile of the entire portfolio. Other than the cost, rebalancing does not affect the expected return of the pro-forma portfolio.
2026-06-06
Question: If the portfolio's target dollar duration is $5.43 million while the current dollar duration is $2.34 million, what is the controlling position dollar duration?
Select an Answer: $2.43 million $.43 million $3,443 million $3.09 million
Rationale:
Target dollar duration = Current dollar duration + Controlling position dollar duration
It follows that:
Controlling position dollar duration = Target dollar duration − Current dollar duration
