All else the same, as the duration of a bond portfolio decreases, the number of bond futures contracts needed to hedge the portfolio will:
A) increase.
B) decrease.
C) not change.
D) increase only if the duration of the bond portfolio is less than the duration of the bond underlying the futures contract.
E) increase only if the duration of the bond portfolio is greater than the duration of the bond underlying the futures contract.

Question

Quizplus · Accepted Answer

As the duration of a bond portfolio decreases, the interest rate sensitivity decreases, meaning that for a given change in interest rates, the portfolio's value will change by a smaller amount. Therefore, fewer bond futures contracts are needed to hedge the portfolio.

All Else the Same, as the Duration of a Bond