Question
Bonds issued by Atril, Co. are currently trading at a credit spread of 260 bps relative to same-maturity treasury securities. A portfolio manager who owns
Bonds issued by Atril, Co. are currently trading at a credit spread of 260 bps relative to same-maturity treasury securities. A portfolio manager who owns $15.7 million of these bonds would like to protect the portfolio against possible increase in spread, and enters a 1 year credit spread forward contract with the current spread as the contracted spread, notional amount equal to the current market value of the position, and a risk factor of 4.67.
On settlement date the credit spread on Atril bonds is 225 bps. What is the payoff to the portfolio manager as a result of the credit spread forward contract?
Correct Answer: -256,616.50
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