Adjusting duration of a bond portfolio

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patso

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Jason Robert, CFA, manages a bond portfolio that has duration of 9.0. Robert believes that interest rates will fall over the next few months and would like to adjust the duration of the portfolio to take advantage of this expectation. Robert should:
A. Sell interest rate futures contracts.
B. Buy interest rate futures contracts.
C. Sell some bonds with high durations from the portfolio.
 
interest rates fall - bond portfolio duration should increase.
so should buy interest rate futures contracts
 
Apologies for my earlier comment. My answer is: since rates are falling - sell interest rate futures. I dont understand why this is incorrect??????????????????
SEE THEIR ANSWER BY KAPLAN BELOW:
“Answer to Level III Question #131: B. The portfolio manager should increase duration (interest rate sensitivity) to take advantage of falling interest rates (rising bond prices). Buying interest rate futures would increase the duration of a bond portfolio.
Choice “a” is incorrect. Selling interest rate futures contracts would decrease the duration of a bond portfolio.
Choice “c” is incorrect. Selling bonds with relatively high durations would lower the portfolio’s duration.”
 
not seeing where their answer is wrong. It is B - buy futures contracts. both the sells are marked wrong ….
am I missing something?
 
when interest rates fall - you need to increase DURATION - so you would buy futures contracts to increase duration.
If you sold anything - your duration would fall.
Remember # of futures contracts = (D target - DPort ) * VPort / VFutures
if DTarget > DPort - which is what should be - your # of futures contracts will be a positive number -> which means BUY.
 
Thanks. I also clarified with the tutor and the consensus is for Level 3, interest rate futrures - “bond” and NOT “interest rate” is the underlying.
 
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