Answer: Buy 4,227 Eurodollar contracts

To hedge the swap position, we need to calculate the net dollar duration exposure: **First swap (pay fixed):** - Notional: $420 million - Duration: 4.433 - Dollar duration = 420,000,000 × 4.433 = $1,861,860,000 - Since it's pay fixed, this represents a short position in bonds **Second swap (receive fixed):** - Notional: $385 million - Duration: 7.581 - Dollar duration = 385,000,000 × 7.581 = $2,918,685,000 - Since it's receive fixed, this represents a long position in bonds **Net dollar duration:** Long position - Short position = 2,918,685,000 - 1,861,860,000 = $1,056,825,000 This means the trader has a net long duration exposure of $1,056,825,000. To hedge this using Eurodollar futures: - Each Eurodollar futures contract has a DV01 of $25 - The DV01 of the position = Dollar duration × 0.0001 = 1,056,825,000 × 0.0001 = $105,682.50 Number of contracts = DV01 position / DV01 per contract = 105,682.50 / 25 = 4,227.3 Since the trader has a net long duration exposure, they need to sell Eurodollar futures to hedge. Therefore, the trader should buy 4,227 Eurodollar contracts.

Author: LeetQuiz Editorial Team