3. Hedging: Suppose you have a bond portfolio with value Vport 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 hedged: Faceport DV port + X DV hedge = 0 Faceport DV port = -XX DV hedge -X = Faceport X DV port DV he hedge (a) A portfolio manager purchases B million face of a JNJ bond that matures 9/1/29 with a 6.95% coupon and is priced at a 1.73% yield to maturity and a 2/27/20 settle. You determine B by adding the last 2 digits of your UIN to 150 (example: last 2 digits is 26, so B is 176 million). How much of a 2/15/30 maturity 1.5% coupon Treasury priced at a 1.33% yield to maturity is required to make portfolio duration neutral? The Treasury settles on 2/26/20. Both bonds pay a semi-annual coupons, and for this purpose, they both accrue interest on an actual/actual basis. Use the Fixed IncomeFn functions to answer the question. (b) What is the change in value for the portfolio and the hedge if interest rates increase 1 bp? 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 signif- icant amount. Suppose you don't rebalance, then what is the actual P/L resulting from changing yields, when yields rise 150 bps? (d) If a hedge is perfect, then P/L would be zero for all interest rate changes. What is contributing to the loss when yields rise 150 bps? (3) (3) (1)