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The interest rate in the economy is 3%. Two ZCB (A and B) are trading, their Face value (FV) $100; you can go long or
The interest rate in the economy is 3%. Two ZCB (A and B) are trading, their Face value (FV) $100; you can go long or short on any of them.
Bond A matures in 5 Years and has Face value (FV) $100,
bond B- matures in 10Y and has Face value (FV) $100,
You own 100 A bonds and cannot sell them for next year. You hear a rumor that FED will change rates overnight to 5%.
How many B bonds do you need to sell short to hedge your position ?
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