Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

8. A bond fund currently holds a bond portfolio with a face value of $10 million. The current market value of the portfolio is only

8. A bond fund currently holds a bond portfolio with a face value of $10 million. The current market value of the portfolio is only 92.2% of face, however. The funds managers anticipate a rise in bond yields (interest rates) in the near future, so they desire a T-bond hedging strategy to protect themselves.

a. Given their rate expectations, should they short or go long in T-bond futures? Explain.

b. The risk managers use $100,000 face value T-bond contracts. If they use a 1-1(nave) hedge ratio between cash and futures positions, how many contracts should they use if they hedge the market value of the portfolio??

c. The deliverable bonds are 10 % with a conversion factor of 1.2922. If accrued interest is zero, what cash amount would be transacted per contract if the quoted futures price is 76-31?

d. At close, the market value of the bond portfolio is now 90.2% of face. The cash amount transacted per contract is .97458 times the face value of the futures contract. Calculate the loss in the bond portfolios market value versus the change in value of the hedge. e. Did the hedge work? Explain.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Wealth Inequality Asset Redistribution And Risk Sharing Islamic Finance

Authors: Tarik Akin , Abbas Mirakhor

1st Edition

3110583739, 3110583887, 9783110583885

More Books

Students also viewed these Finance questions

Question

how did the financial crisis 2007/8 affect royal bank of scotland?

Answered: 1 week ago