Interview Question: Hedge Your Bets

Sample Question #92 (finance – hedging)

Our group owns a large amount of 10-year U.S. Treasury Notes. I can’t tell you the exact number but let’s say it’s $50 million in face value. What can we do so our risk exposure on this position is limited to some given fraction of the total value?

(Comment: I was given this very easy question at a job interview with a global macro fund a few years ago)

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One Response to Interview Question: Hedge Your Bets

  1. Brett says:

    ANSWER
     
    Easy question: since it’s 10-year T-Notes, you just short some T-Notes futures contracts, for the amount that’s the difference between your total T-Notes holding ($50mm) and your acceptable net exposure.
     
    BTW, if the position involves bonds of different types and maturities, you can still use futures; some math will be involved to calculate the necessary futures position (types and amounts). 

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