Question
Securities A, B, and C have the following cash flows: (Ignore taxes) Year 1 Year 2 Year 3 A $ 57 $ 57 $ 57
Securities A, B, and C have the following cash flows: (Ignore taxes)
Year 1 | Year 2 | Year 3 | ||||||||||
A | $ | 57 | $ | 57 | $ | 57 | ||||||
B | 137 | |||||||||||
C | 27 | 27 | 127 | |||||||||
a. Calculate their durations if the interest rate is 10%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. Suppose that you have an investment of $11.7 million in A. What combination of B and C would hedge this investment against interest rate changes? (Enter your numeric answers as a positive value. Do not round intermediate calculations. Enter your numeric answers in millions rounded to 3 decimal places.)
c. Now suppose that you have a $11.7 million investment in B. How would you hedge? (Enter your numeric answers as a positive value. Do not round intermediate calculations. Enter your numeric answers in millions rounded to 3 decimal places.)
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