QUESTION 3: You are the manager of Ayala Pension Fund. Today is May. You plan to buy $100 million face value of 7-year CORPORATE bonds, next month, on June 1st- when new pension contributions will be available. The current market value of the bonds is $110 million, but you expect that INTEREST RATES WILL FALL by June and wish to hedge the interest rate risk. There exists a futures contract on 5 -year Treasury notes and a futhres contract on 10 -year Treasury notes. Both have a delivery date of June 1st. The 5 -year Treasury notes futures contract is currently priced at $104,484.375 per face value of $100,000. The 10-year Treasury notes futures contract is currently priced at $106,437.5 per face value of $100,000. You estimate the following regressions for the hedging period: a. Design the optimal hedging strategy using futures contracts. b. You are hedging until the delivery day of the futures contracts. Is your optimal hedging strategy (in A) riskless? EXPLAIN. QUESTION 3: You are the manager of Ayala Pension Fund. Today is May. You plan to buy $100 million face value of 7-year CORPORATE bonds, next month, on June 1st- when new pension contributions will be available. The current market value of the bonds is $110 million, but you expect that INTEREST RATES WILL FALL by June and wish to hedge the interest rate risk. There exists a futures contract on 5 -year Treasury notes and a futhres contract on 10 -year Treasury notes. Both have a delivery date of June 1st. The 5 -year Treasury notes futures contract is currently priced at $104,484.375 per face value of $100,000. The 10-year Treasury notes futures contract is currently priced at $106,437.5 per face value of $100,000. You estimate the following regressions for the hedging period: a. Design the optimal hedging strategy using futures contracts. b. You are hedging until the delivery day of the futures contracts. Is your optimal hedging strategy (in A) riskless? EXPLAIN