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Q2. An investor holds 100,000 units of a bond whose features are summarized in the following table. He wishes to be hedged against a parallel
Q2. An investor holds 100,000 units of a bond whose features are summarized in the following table. He wishes to be hedged against a parallel rise in interest rates. Maturity Coupon rate YTM Duration Price 18 years 9.5% 8% 9.5055 $114.181 Characteristics of the hedging instrument, which is a bond here, are as follows: Maturity Coupon rate YTM Duration Price 20 years 10% 8% 9.8703 $119.792 Coupon frequency and compounding frequency are assumed to be semiannual. YTM stands for yield to maturity. The YTM curve is flat at an 8% level. 1. What is the quantity 0 of the hedging instrument that the investor has to sell? 2. We suppose that the YTM curve increases instantaneously by 0.1%. a. What happens if the bond portfolio has not been hedged? b. And if it has been hedged? 3. Same question as the previous one when the YTM curve increases instanta-neously by 2%. 4. Conclude
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