Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity. The duration gf the T-notes, Baa bonds, and GIC is 1.93 years, 6.9 years, and 4.5 years, respectively. On the advice of its chief financial officer, Allright wants to hedge the balance sheet with T-bond option contracts. The underlying bonds currently have a duration of 8.82 years and a market value of $97,000 per $100,000 face value. Further, the delta of the options is 0.5. www Market interest rates are expected to increase 1 percent to 11 percent in the next year. If this occurs, what will be the effect on the market value of equity of Allright? What type of contract, and how many contracts should Allright use to hedge this balance sheet?

Allright Insurance has total assets of $140 million consisting of $50 million in 2 -year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5 -year, 5 percent fixed rate GICs and equity. The duration gf the T-notes, Baa bonds, and GIC is 1.93 years, 6.9 years, and 4.5 years, respectively. On the advice of its chief financial officer, Allright wants to hedge the balance sheet with T-bond option contracts. The underlying bonds currently have a duration of 8.82 years and a market value of $97,000 per $100,000 face value. Further, the delta of the options is 0.5 . Market interest rates are expected to increase 1 percent to 11 percent in the next year. If this occurs, what will be the effect on the market value of equity of Allright? What type of contract, and how many contracts should Allright use to hedge this balance sheet