48) Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6

percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds.

These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.

On the advice of its chief financial officer, Allright wants to hedge the balance sheet

with T-bond option contracts. The underlying bonds currently have a duration of 8.82

years and a market value of $97,000 per $100,000 face value. Further, the delta of the

options is 0.5. What type of contract, and how many contracts should Allright use to

hedge this balance sheet?

The answer is put contracts and 625 contracts. Would someone be able to show work and how this answer is derived? Thank you.