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himani225
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Posts: 1
Joined: November 24th, 2003, 11:07 pm

hedging with futures

September 7th, 2004, 3:25 pm

I have a convertible bond and I would like to hedge the interest rate using duration balancing using futures on Tsy bonds. The duration of the bond is .75 y. I could do that with a 2 y futures and 5 yr futures by finding the corresponding number of contracts. Does it matter if I use either of the instruments? What are the aspects I should consider while choosing the instruments?
 
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exotiq
Posts: 2
Joined: October 13th, 2003, 3:45 pm

hedging with futures

September 7th, 2004, 3:58 pm

himani225-Didn't Francis ever teach you anything about the limits of duration hedging and what the differences are between different points on the yield curve? ;-PBigger question I have for you is why are you looking to hedge with treasury futures? Is it trading costs, counterparty credit risk concerns, mark-to-market benefits (and disadvantages)? If you are considering treasury futures, the currency of your convertible probably has a very liquid swap market, unless this is a way of quietly taking a prop position on the swap spread >
 
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himani225
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Posts: 1
Joined: November 24th, 2003, 11:07 pm

hedging with futures

September 7th, 2004, 8:26 pm

Francis taught me what he taught you - just that one brain is small and the other is big..What other instruments are you thinking of when you are surprised with T- futures? What do you think could be the disadvantages of T-futures?
 
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daveangel
Posts: 5
Joined: October 20th, 2003, 4:05 pm

hedging with futures

September 8th, 2004, 7:32 am

You might find a bit of duration mis-match between your bond and the bond futures contract ...
Last edited by daveangel on September 7th, 2004, 10:00 pm, edited 1 time in total.
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Gmike2000
Posts: 0
Joined: September 25th, 2003, 9:49 pm

hedging with futures

September 8th, 2004, 8:32 am

what drives the price of the convertible bond? do you really think it is the tsy curve? do a regression on the bond's yield changes and 2yr or 5yr yield changes. without looking at the results, i bet it is a low r^2.the other thing: if you hedge with a combination of 2s and 5s you may hedge the (current) duration, but you are loading up with curve exposure (bullet vs barbell).
 
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exotiq
Posts: 2
Joined: October 13th, 2003, 3:45 pm

hedging with futures

September 8th, 2004, 10:54 am

From a purely interest rate hedging standpoint, your pure hedge would be to swap the coupons of the CB into floating with a plain IR swap.With either hedging tool, the CB will leave you holding the bag in the event of a default, call, or conversion, especially since the last two care more about market value than par value, but then again, that's why they pay you the big bucks...
 
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derivababy
Posts: 1
Joined: August 25th, 2003, 2:39 pm

hedging with futures

September 26th, 2004, 2:04 pm

Hi Gimke2000,Pls., could u elaborate on Quotethe other thing: if you hedge with a combination of 2s and 5s you may hedge the (current) duration, but you are loading up with curve exposure (bullet vs barbell).