CFA Mock 2018 Q7B

CFA Level III
#1

Hello,

Just reviewing a mock and looking for clarity on the CFA answer as I think its wrong but its probably me.

Question 7B in the 2018 AM paper is about closing the duration gap:

“Determine whether Zerbe should take a long or short position in the futures contracts.
Calculate the number of futures contracts required to close the duration gap. Show your
calculations”

So seems pretty straight forward but I calculated going long 44 futures contract and the answer is to short 44 contract.

“The future liability now has a present value of USD 91,732,436 and a modified duration of 8.867.
The immunization portfolio has a market value of USD 92,749,570 and a modified duration of
9.107.
Zerbe closes this duration gap using a US Treasury note futures contract in a derivatives overlay
strategy. Based on the cheapest-to-deliver bond she determines the basis point value (BPV) for
one futures contract is USD 71.32”

Surely the immunization portfolio determines the BPV duration target no? The answer suggests otherwise.

Any guidance most welcome :slight_smile:

All the best!

#2

What’s the money duration of the assets? Call it A.

What’s the money duration of the liabilities? Call it L.

If A < L, you need to add money duration to your assets; buy futures.

If A > L, you need to subtract duration from your assets; sell futures.

1 Like
#3

Ah awesome! Yep, answer is indeed right.

Thanks for the clarity, definitely a better way to think about the fixed income questions like this.

#4

Sometimes I get these things right.