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Suppose that you are long in 4-year bonds and you want to use 3-year bonds to hedge the interest rate risk. The data on these
Suppose that you are long in 4-year bonds and you want to use 3-year bonds to hedge the interest rate risk. The data on these bonds are -
Bond Yield Duration Volatility (%) 3-year 0.10 2.75 2.50 4-year 0.10 3.52 3.20
To hedge the long position in 4-year bond, we need to sell 3-year bond. How much to sell?
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