Question 5

You are a financial manager and you have bonds worth $3,000,000 in your portfolio which have a 7 percent coupon rate and will be maturing in 10 portfolio which have a 7 percent coupon rate and will be maturing in 10 years from now. What type of risk exposure do you face on these bonds? Suppose a futures contract on these bonds is available with a standard contract size of US$300,000 per contract. How will you hedge your exposure? If the market interest rates change to 9 percent, what will be your position?