The case is here: https://merage.uci.edu/~jorion/oc/case.html
Q1: On December 31, 1994, the portfolio manager decides not to liquidate the portfolio, but simply to hedge its
interest rate exposure. Develop a strategy for hedging the portfolio, using (i) interest rate futures, (ii) interest
rate swaps, and (iii) interest rate caps or floors. For each strategy, describe the instrument and whether you
should take a long or short position.
Q2: On that day, the March T-bond futures contract closed at 99-05. The contract has notional amount of
$100,000. Its duration duration can be measured by that of the Cheapest-To-Deliver (CTD) bond, which is
assumed to be 9.2 years. Compute the number of contracts to buy or sell to hedge the Orange County
portfolio.
Q3: This contract has typical trading volume of 300,000-400,000 contracts daily. Verify with recent volume data
at the Chicago Board of Trade (CBOT). Would it have been possible to put a hedge in place in one day?
Q4: Assuming that futures can be sold in the required amount, would the resulting portfolio be totally riskless?