1. Hedging: Suppose you have a bond portfolio with face value Port F and DV01 of DV port and wish to hedge interest rate risk by selling short another security with DV01 of DV hedge. You will sell the following face amount of the hedging security to be duration nuetral: PortFDVport+XDVhedge=0PortFDVport=XDVhedgeX=PortFDVhedgeDVport You will use the FixedIncomeFn functions in R to answer the following questions. (a) A portfolio manager purchases $100 million face of a TGT (Target) bond and wishes to hedge it with the current 20-year on-the-run Treasury bond. How much of the Treasury bond is required to be sold short to make the postion duration neutral? (b) If the yield for both TGT and the Treasury bonds increase 1bp, what is the net P/L? Compute the actual P/L and not the one predicted using DV01. (c) This hedge will need to be rebalanced to make it duration neutral as yields move a significant amount. Suppose you don't rebalance, then what is the actual P/L when yields rise 150bps for both TGT and the Treasury? 2. Understanding spreads: (a) What is the initial TGT spread to the 20-year Treasury? (b) Suppose yields increase but the spread tightens: The TGT yield rises 25 bps while the 20-year Treasury rises 30 bps. (a) What is the new TGT spread to the 20-year Treasury? (b) What is the actual P/L? (c) Now let's go the other way. Suppose yields fall but the spread widens: The TGT yield falls 25bps while the 20 -year Treasury falls 30bps. (a) What is the new TGT spread to the 20-year Treasury? (b) What is the actual P/L? 1. Hedging: Suppose you have a bond portfolio with face value Port F and DV01 of DV port and wish to hedge interest rate risk by selling short another security with DV01 of DV hedge. You will sell the following face amount of the hedging security to be duration nuetral: PortFDVport+XDVhedge=0PortFDVport=XDVhedgeX=PortFDVhedgeDVport You will use the FixedIncomeFn functions in R to answer the following questions. (a) A portfolio manager purchases $100 million face of a TGT (Target) bond and wishes to hedge it with the current 20-year on-the-run Treasury bond. How much of the Treasury bond is required to be sold short to make the postion duration neutral? (b) If the yield for both TGT and the Treasury bonds increase 1bp, what is the net P/L? Compute the actual P/L and not the one predicted using DV01. (c) This hedge will need to be rebalanced to make it duration neutral as yields move a significant amount. Suppose you don't rebalance, then what is the actual P/L when yields rise 150bps for both TGT and the Treasury? 2. Understanding spreads: (a) What is the initial TGT spread to the 20-year Treasury? (b) Suppose yields increase but the spread tightens: The TGT yield rises 25 bps while the 20-year Treasury rises 30 bps. (a) What is the new TGT spread to the 20-year Treasury? (b) What is the actual P/L? (c) Now let's go the other way. Suppose yields fall but the spread widens: The TGT yield falls 25bps while the 20 -year Treasury falls 30bps. (a) What is the new TGT spread to the 20-year Treasury? (b) What is the actual P/L
