# Variation margin,

Variation margin, 150 150 Affordable Capstone Projects Written from Scratch

AMME5105 Assignment 2, April 24, 2018.
Due May 10, 5pm. To be submitted via turnitin
Please submit answers in a word or PDF file with the question numbers clearly marked.
Assume:
 Spot Date May 1, 2018
 Three and ten year bond futures expiry June 14, 2018
Question 1: (8 Marks)
You sell 5 three year bond futures contracts at 97.69 and buy 4 ten year contracts at 97.115. You hold your position for 3 days then close everything out. What would be the variation margin (for each position and aggregated) if the following were the prices over your holding period:
Ignore any initial margin.
TYB
XYB
Purchase Day1 (May 1, 2018)
97.69
97.115
Close Day1
97.695
97.115
Close Day2
97.700
97.115
Close Day3
97.725
97.160
Close Day4
97.700
97.175
Question 2:
On May 1, 2018, you hold \$50,000,000 face value of a bond which matures on June 15, 2026. It is currently trading at a yield to maturity of 3.69%, (Use the futures price from question 1 above).
What is the DV01 for your holding. (2 Marks)
You are nervous about rates increasing and also that the yield curve may steepen. Calculate the linear hedge combination of three and ten year futures contracts to hedge this position against parallel shifts and linear steepening and flattening of the yield to maturity curve. (10 Marks)
On June 1, 2018, the three year future is at 96.6 and the ten year is at 95.9. Your bond yield to maturity is now 4.855%. What is the total P+L (profit and loss) from your bond plus the futures hedge. What is attributed to movement in the bond yield to maturity and what is attributed to your futures hedge. (10 Marks)
Bonus Question (5 marks)
From your answers in question 2, can you explain what would have happened if the position was not hedged. Also explain why the hedge was not perfect.

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