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#5 On zero-coupon T-bonds, the current yield to maturity, with ten years to maturity, is valued at a total of seven percent. This put option

#5

On zero-coupon T-bonds, the current yield to maturity, with ten years to maturity, is valued at a total of seven percent. This put option contract has a strike price that is equal to the current price of the t-bonds, with a face value, of $200,000. This option contract has a premium at the amount of $4,000.

a)Calculate the amount of put option contracts that should be purchased, so that if the interest rates were to rise a total of one percent, the net would equal $100 million, from the contracts. How many put option contracts should be purchased?

***make sure when calculating, you subtract the premium that is paid for the options***

b)Day zero:In this situation, simulate that you have purchased the put options and that the current futures price is equal to the strike price on the options.To begin a dynamic hedge, how many futures contracts should you buy?

#5 Part 2

Calculate the number of contracts for each day. (the size of the long position, per day)

c)Day one:the futures price is 2 point above the strike price?

d)Day two:the futures price is 1 points below the strike price?

e)Day three:the futures price is 2 points below the strike price?

f)Day four:the futures price is 1 point above the strike price. 600 contracts have been sold, but the futures price ultimately decreases a total of one point. At this point, what would be the recommended contracts to sell?

g)Day five:the futures price is one point below the strike price?

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