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Assuming you are long 1 of the 30-year bond (f) How many of the 5-year bonds should you buy/sell to be hedged? Based on this
Assuming you are long 1 of the 30-year bond (f) How many of the 5-year bonds should you buy/sell to be hedged? Based on this hedge ratio, will you have to borrow or deposit money? (8) Using that hedge ratio, from (f), compute the (combined) net price change (i.e., PnL) from -100 bp to +100 bp in increments of 25 bp. Chart the results. What do you think? (h) Repeat part (g) but also assume that 1/4 of a year, and then 1/2 year, has transpired and use a 5% CC rate for any borrowed/deposited cash. Add this to the chart and comment Consider two ZC bonds. A 5-year with CC yield of 6% and a 30-year with yield of 7%. Assuming you are long 1 of the 30-year bond (f) How many of the 5-year bonds should you buy/sell to be hedged? Based on this hedge ratio, will you have to borrow or deposit money? (8) Using that hedge ratio, from (f), compute the (combined) net price change (i.e., PnL) from -100 bp to +100 bp in increments of 25 bp. Chart the results. What do you think? (h) Repeat part (g) but also assume that 1/4 of a year, and then 1/2 year, has transpired and use a 5% CC rate for any borrowed/deposited cash. Add this to the chart and comment Consider two ZC bonds. A 5-year with CC yield of 6% and a 30-year with yield of 7%
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