8006 Exam Dumps : Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

The underlying asset in a Treasury note futures contract is any long term Treasury note with a maturity of no less than 6.5 years and no more than 10 years. The underlying asset in a treasury bond futures contract is any long term US Treasury bond with a maturity of more than 15 years and not callable within 15 years.

Note the difference betwen what the underlying asset is for treasury bond futures and treasury note futures. In either case, adjustments will be made for the coupon and maturity of the actual bond delivered (the concept of the adjustment of 'cheapest-to-deliver').

A zero coupon bond has a Macaulay duration equal to its maturity, ie in this case 5 years. We can calculate modified duration from Macaulay duration by using the following relationship:

Modified duration = Macaulay duration/(1 + y) where y is the yield.

Therefore the correct answer is 5 / (1.05) = 4.76.

Or intuitively, all the other answers appear clearly incorrect: 5 and 5.25 are too high, and 4 is too low. Therefore the only reasonable choice is 4.76.

Futures contracts carry no gamma. Only options have gamma. Choice 'a' is the correct answer. Any instrument whose price varies in a linear fashion with respect to the underlying will have gamma equal to zero.