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### Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

# estion: A member of an investment committee interested in learning more about fixed-income investment procedures recalls that a fixed-income manager recently stated that derivative instruments could be used to control portfolio duration, saying, “A futures like position can be created in a portfolio by using put and call options on Treasury bonds.”a. Identify the options market exposure or exposures that create a “futures-likeposition” similar to being long Treasury-bond futures. Explain why the position you created is similar to being long Treasury-bond futures.b. Explain in which direction and why the exposure(s) you identified in part (a) would affect portfolio duration.c. Assume that a pension plan’s investment policy requires the fixed-income manager to hold portfolio duration within a narrow range. Identify and briefly explain circumstances or transactions in which the use of Treasury-bond futures would be helpful in managing a fixed-income portfolio when duration is constrained.

a. As below

b. Increase duration

c. Offer flexibility to pursue other strategies without worrying about its impact

See the step by step solution

## Step-by-Step Solution

alue at expiration = Value of call + Value of put + Value of stock

= $0 + ($35 – $30) +$30 = \$35

Given 5,000 shares, the total net proceeds will be:

(Final Value – Original Investment) × # of shares

## Step 1: Explanation on option market exposure

On buying a call option and writing a put option on a T bond, the total payoff on maturity would be . This is equivalent to the profit on future’s position with future price X.

If the exercise price (X) is equal to current T-bond future price, the profit on the portfolio would replicate the market traded futures.

## Step 2: Explanation on the direction of the exposure

Just as adding a T-bond would increase the portfolio duration.

## Step 3: Explanation on circumstances

Since the futures can be traded quickly and cheaply, managers get the flexibility to pursue other strategies that don’t affect portfolio duration.