Question
A fund manager anticipates purchasing 500 of aAA ratedcorporate bond with a face value of $1,000,3%coupon rate,12years of maturity, modified duration of 10and forward price
A fund manager anticipates purchasing 500 of aAA ratedcorporate bond with a face value of $1,000,3%coupon rate,12years of maturity, modified duration of 10and forward price of $1,072 in 3 months. The manager is afraid that in the meantime interest rates might fall and the bond's price rises. There are no forward or futures contracts available for the bond, but the manager decides to hedge against interest rate movements using a T-bond futures contract with futures price of $98,753 and modified duration of 8.
Calculate the profit/loss from the hedge transaction, if in three months the futures contract'sprice is 117,615 and the AA rated corporate bond's price is 1,085.
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