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A bank wishes to hedge its $25 million face value bond portfolio (currently priced at 106% of par). The bond portfolio has a duration of
A bank wishes to hedge its $25 million face value bond portfolio (currently priced at 106% of par). The bond portfolio has a duration of 5 years. They will hedge with put options that have a delta of 0.67. The bond underlying the option contract has a market value of $112,000 and a duration of 8 years. How many put options are needed? Assume that there is no basis risk on the hedge.
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