Question 9 (20 points) A firm intends to BUY in two months a bullet bond debt with US$200,000,000 principal amount. Features of the bond are the following: . . Annual coupon rate: 8% Maturity: 9 years Price: 115.03 We estimate the relationship between the yield to maturity of bond to be hedged, denoted by YA, and the yield to maturity of the cheapest to deliver, denoted by Yctd. The result is: = 1.35 a. (2 marks) Which change (up or down) in rates is unfavorable for the issuer? Explain why. b. (3 marks) We suppose that a futures contract exists on the market with a 2-month maturity. Explain why a correct position taken on this contract enables the firm to hedge its interest-rate risk? c. (15 marks) The futures contract delivers a US Treasury bond with a 10-year maturity and 10% annual coupon rate. Its nominal amount is US$ 1,000,000. The price of the futures contract is 121.105 and Yield to Maturity (YTM) of the underlying bond is 7%. What is the position that the firm has to take in order to hedge interest-rate risk? Question 9 (20 points) A firm intends to BUY in two months a bullet bond debt with US$200,000,000 principal amount. Features of the bond are the following: . . Annual coupon rate: 8% Maturity: 9 years Price: 115.03 We estimate the relationship between the yield to maturity of bond to be hedged, denoted by YA, and the yield to maturity of the cheapest to deliver, denoted by Yctd. The result is: = 1.35 a. (2 marks) Which change (up or down) in rates is unfavorable for the issuer? Explain why. b. (3 marks) We suppose that a futures contract exists on the market with a 2-month maturity. Explain why a correct position taken on this contract enables the firm to hedge its interest-rate risk? c. (15 marks) The futures contract delivers a US Treasury bond with a 10-year maturity and 10% annual coupon rate. Its nominal amount is US$ 1,000,000. The price of the futures contract is 121.105 and Yield to Maturity (YTM) of the underlying bond is 7%. What is the position that the firm has to take in order to hedge interest-rate risk