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Question
Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. The bank has $1,000 million in assets and $750 million in liabilities. It is planning to trade in Treasury bond futures whose underlying's duration is 8.5 years and is currently selling at $99,000 for a $100,000 contract. How many futures contracts does the bank need to fully hedge itself against interest rate risk?
A. 3,714 contracts
B. 3,125 contracts
C. 2,971 contracts
D. 371 contracts
E. None of the options are correct
Answer
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