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Consider the following bonds: ( 1 ) A bond with maturity in three years, which pays out a yearly 3 % coupon. ( 2 )
Consider the following bonds:
A bond with maturity in three years, which pays out a yearly coupon.
A bond with maturity in two years, which pays out a yearly coupon.
A zero couponbond with maturity in four years.
All bonds have a facevalue equal to SEK and a yield to maturity equal to ; the
first interest coupons are due in one year from today.
We want to hedge a default portfolio comprised of a long position in five bond of
the type in
How can we use the bonds in and to hedge the default portfolio against
changes in the YTM such that the present values of the hedge and the default portfolio are identical in absolute terms, but have opposite signs?
The requirements imposed in guarantee that if the YTM on all bonds
remains unchanged, then the present values of the default portfolio and the hedge will
be identical, in absolute terms, albeit they will generally be different from todays ones.
Verify that this would be the case by calculating the value of each portfolio in one
year, in the scenario of unchanged YTM; do remember to include the cash payments
due on the bonds.
Consider again the scenario in one year from now, with unchanged YTMs in
Would the slopes of the default portfolio and the hedge also be identical, up to
their signs? Dear Expert, I am preparing to write exams on this question, unfortunately, I don't understand anything concerning this question. I want to appreciate this question by getting to know the meaning and reasons behind the calculations. I wish you can add calculations to your explanation please.
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