Creating a duration neutral portfolio
Hedging is a very important part of working with bonds and bond portfolios. In this exercise, you are going to find the quantity of a bond needed to hedge a portfolio, as well as the dollar amount of this quantity.
Say you own a portfolio of bonds whose combined DV01 is USD 5,000. You decide to hedge this portfolio by selling a fixed amount of the 30 year bond from the previous exercise, which has a price of USD 76.94 and a DV01 of 12.88 cents.
This exercise is part of the course
Bond Valuation and Analysis in Python
Exercise instructions
- Assign the DV01 of the portfolio and the bond to
portfolio_dv01,bond_dv01, respectively, and the bond price tobond_price. - Find the number of bonds needed to hedge the portfolio.
- Find the dollar value of this amount of bonds.
Hands-on interactive exercise
Have a go at this exercise by completing this sample code.
# Assign DV01 of portfolio and bond to variables
portfolio_dv01 = ____
bond_dv01 = ____
bond_price = ____
# Calculate quantity of bond to hedge portfolio
hedge_quantity = ____
print("Number of bonds to sell: ", ____)
# Calculate dollar amount of bond to hedge portfolio
hedge_amount = ____
print("Dollar amount to sell: USD", ____)