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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
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
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