Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the following problem: A corporation plans to issue 1 million of 5-year bonds in 3 months. At current yields, the bonds would have a

Consider the following problem:

A corporation plans to issue 1 million of 5-year bonds in 3 months. At current yields, the bonds would have a modified duration of 4 years. The corporation desires to hedge their interest rate exposure with 20-year T-bond futures which have a modified duration of 9 years. Each futures contract has a par value of 100,000 and currently sold at 90,000. The corporation estimates that the yield on 20-year bonds changes by 1 basis points for every 1.5-basis-point move in the yield on 5-year bonds

(i) How can the firm use this T-bond futures contract to hedge the risk surrounding the yield at which it will be able to sell its bonds? [20 marks]

(ii) Suppose that the yield on 20-year bonds actually changes by 1 basis points for every 1-basis-point move in the yield on 5-year bonds. Does the corporation have to review their decision on futures position?What should they do?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Restructuring And Innovation In Banking

Authors: Claudio Scardovi

1st Edition

331940203X, 978-3319402031

Students also viewed these Finance questions

Question

=+Identify the key components of a strategic plan

Answered: 1 week ago