Given: all ZCBs in this question have Face Value $100,000

Q2.1 You own a 5Y $100MM (Face Value) ZCBs (Bonds A ) and want to hedge its value against the expected rate hike from 3% to 5%.

Available hedge instrument: a 10Y $100MM (Face Value ) ZCB (Bond B ). How much of Bond B should you short?

Q2.2 You had shorted the needed(as calculated above) number of bonds B. Rate went from 3% to 5%-- but the value of your position did not sufferdue to the hedge. And you still hold both the same long position in A and short position in B.

Now the rumor is that rates will go up to 7%. Are you protected by the hedge that you have put in Q.2.1?