Victor Lu is the fixed income manager of a large Canadian pension fund. The present value of the pension fund’s portfolio of assets is CAD 4 billion while the expected present value of the fund’s liabilities is CAD 5 billion. The respective modified durations are 9.254 and 6.825 years. The fund currently has an actuarial deficit (assets < liabilities) and Victor must avoid widening this gap. There are currently two scenarios for the yield curve: The first scenario is a downward shift of 25bp, with the second scenario an upward shift of 25bp. The most liquid interest rate futures contract has a present value of CAD 68,336 and a duration of 2.1468 years. Analyzing both scenarios separately, what should Victor do to avoid widening the pension fund gap? Choose the best answer. a Scenario 1 Scenario 2
(a) Short futures Long futures
(b) Long futures Short futures
(c) Short futures Short futures
(d) Long futures Long futures
13. According to the CME Group, the market price of the E-mini futures is $2,939.25. Each futures contract delivers 50 times the index. A long-only equity portfolio with market value of USD $10,000,000 has a beta of 1.25. The portfolio manager is planning to increase market exposure such that the portfolio beta becomes 2.25. How many futures contracts should the manager long/short?
(a) Short 68
(b) Long 68
(c) Short 51
(d) Long 51
