Based on the price sensitivity hedge ratio,if the modified duration of the futures contract increases (assumed to be positive),then the optimal number of futures contracts increases.Assume the durations are positive.

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Quizplus · Accepted Answer

The price sensitivity hedge ratio formula involves dividing the duration of the bond being hedged by the duration of the futures contract. If the modified duration of the futures contract increases, the denominator in the formula increases, and therefore the hedge ratio decreases. Since a lower hedge ratio means more futures contracts are needed to achieve a desired level of hedging, the optimal number of futures contracts will increase.

Based on the Price Sensitivity Hedge Ratio,if the Modified Duration