John owns a bond portfolio worth $2 million with duration of 10.

John owns a bond portfolio worth $2 million with duration of 10.

What positions must he take to hedge this portfolio against a small parallel shifts in the term structure.
A . Long position worth $2 million with duration of 10.
B . Long position worth $20 million with duration of 1.
C . Short position worth $2 million with duration of 10.
D . Short position worth $20 million with duration of 1.

View Answer

Answer: D

Explanation:

To hedge a bond portfolio against small parallel shifts in the term structure, you need to take a position in an instrument with an equal and opposite duration. John has a bond portfolio worth $2 million with a duration of 10. To hedge this, he should take a short position in bonds worth $20 million with a duration of 1. This is because the product of the value and duration of the hedge position should equal the product of the value and duration of the original portfolio (2 million * 10 = 20 million * 1).