Question
Below are the prices, DV01's and convexities of a 20-year Treasury bond and a call option on this bond. The call is on $100 face
Below are the prices, DV01's and convexities of a 20-year Treasury bond and a call option on this bond. The call is on $100 face of the bond.
Yield: 5.00%
Bond Price: 100.00
Bond DV01: 0.08
Bond Convexity: 70
Call Price: 5
Call DV01: 0.04
Call Convexity: 9000
(a) A callable bond is a portfolio of long position in the 20-year bond and short position in the call. What are the duration and convexity for the callable bond?
(b) Construct a portfolio of the callable and the call option that has zero duration and positive convexity?
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
a To calculate the duration and convexity of the callable bond we need to combine the duratio...
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Management Science The Art Of Modeling With Spreadsheets
Authors: Stephen G. Powell, Kenneth R. Baker
4th Edition
978-1118517376, 9781118800348, 1118517377, 1118800346, 978-1118582695
