Question
Using Excel Spreadsheet An FI has a $100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at
Using Excel Spreadsheet
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An FI has a $100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at par and have a duration of five years. The FI wishes to hedge the portfolio with T-bond options that have a delta of 0.625. The underlying long-term Treasury bonds for the option have a duration of 10.1 years and trade at a market value of $96,157 per $100,000 of par value. Each put option has a premium of 3.25 (percent of $100,000). (LG 23-4)
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How many bond put options are necessary to hedge the bond portfolio?
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If interest rates increase 100 basis points, what is the expected gain or loss on the put option hedge?
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What is the expected change in market value on the bond portfolio?
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How far must interest rates move before the payoff on the hedge will exactly offset the cost of placing the hedge?
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How far must interest rates move before the gain on the bond portfolio will exactly offset the cost of placing the hedge?
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Please show formulas in excel
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