QUESTION 7. A portfolio manager invests a nominal amount of $50,000,000 in a bond A with a price (in % of the nominal amount) and modified duration are, respectively, 93.274 and 8.319. She is worried about a rate increase and wants to protect her investment. Suppose that the hedging instrument is bond B with price (in % of the nominal amount) and modified duration are, respectively, 105.264 and 7.04. Its face value is $1,000. Assume that changes in yields are not equal and that the relationship between the yield to maturity of bond A denoted by y, and the yield to maturity of bond B denoted by yn is equal to Ay = 1.18x Ay (eg: a 10-bp move of the yield yB will be accompanied by a 1.18 10 bps = 11.8 bps change in the yield yA.) Determine how the investor would hedge the investment in bond A using bond B.