Beatriz Maestre case scenario Q #32:
Relates to how many options contracts you need to hedge and what is the manager’s view if not hedged fully.There is a negative duration gap of PVBP 32,034 and to hedge using options PVBP is 97.40, you need to sell 328 contracts. The manager sold 254 contracts- what is his view on rates?
Can someone explain this how this is reasoned out please?
The manager did not fully hedge the exposure because he believed that interest rates would fall. Duration measures a portfolio’s sensitivity to interest rates; bonds and interest rates are negatively correlated. Thus if the manager believes that interest rates are going to fall they want to have more duration in their portfolio which is why he did not fully hedge his exposure and sold less contracts than required for a full hedge.