Henry was concerned about this position for three reasons: (1) there was an unrealized loss on the PG bonds due to a widening in the yield spread between U. S. Treasuries and high- grade corporate bonds; (2) he felt that the PG bonds represented too large a portion of the $ 100 million portfolio; and (3) he feared that interest rates would move higher over the short term.

Hawaiian Advisors has the capability to do short sales and to use financial futures as well as options on futures. With this in mind, Henry collected some information on the PG bonds and on some alternative vehicles, shown in Tables 22.7 and 22.8.

Henry recalled that the formula for calculating a hedge ratio is

Hedge ratio = Yield beta × PVBP (y) / PVBP(x)