Question
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
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started