Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 5 A manager wishes to hedge a bond with a par value of $40 million by selling Treasury bond futures. Suppose that (1) the

image text in transcribed

Problem 5 A manager wishes to hedge a bond with a par value of $40 million by selling Treasury bond futures. Suppose that (1) the conversion factor for the cheapest-to-deliver issue is 0.95, (2) the price value of a basis point of the cheapest-to-deliver issue at the settlement date is $0.1335 per $100 of principal, and (3) the price value of a basis point of the bond to be hedged is $0.1226 per $100 of principal. Finally, the market price (per $100 of principal) of the cheapest to deliver is $98 while the market price (per $100 of principal) of the bond to be hedged is $95. Answer the below questions. a) What are the modified durations of the two bonds? b) What hedge ratio should the manager use to hedge the bond with the futures? c) How many Treasury bond futures contracts should be sold to hedge the bond? Problem 5 A manager wishes to hedge a bond with a par value of $40 million by selling Treasury bond futures. Suppose that (1) the conversion factor for the cheapest-to-deliver issue is 0.95, (2) the price value of a basis point of the cheapest-to-deliver issue at the settlement date is $0.1335 per $100 of principal, and (3) the price value of a basis point of the bond to be hedged is $0.1226 per $100 of principal. Finally, the market price (per $100 of principal) of the cheapest to deliver is $98 while the market price (per $100 of principal) of the bond to be hedged is $95. Answer the below questions. a) What are the modified durations of the two bonds? b) What hedge ratio should the manager use to hedge the bond with the futures? c) How many Treasury bond futures contracts should be sold to hedge the bond

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

Step: 3

blur-text-image

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

Bond Markets Analysis and Strategies

Authors: Frank J.Fabozzi

9th edition

133796779, 978-0133796773

More Books

Students also viewed these Finance questions

Question

c. What is the persons contact information?

Answered: 1 week ago

Question

=+f. Does it promise a benefit or solve a problem?

Answered: 1 week ago

Question

=+ Why do some seem like a personalized, individual message?

Answered: 1 week ago