You work on a credit trading desk of a bank. Your boss wants to take along a $10m position in BASF credit. He asked you to look into few BASF bonds and present him a recommendation on which bond to buy. He proposed the following bonds.
Outstanding Amount Px Currency (3Feb2021) Ticker Name ISIN Coupon Maturity Maturity Type Announced BASGR BASF SE XS1823502650 0.875 22-May-25 AT MATURITY 750,000,000 5/15/2018 EUR 104.744 BASGR BASF SE DE000A289DC9 0.25 5-Jun-27 CALLABLE 1,000,000,000 5/28/2020 EUR 102.167 BASGR BASF SE XS1718418103 0.875 25-Nov-27 CALLABLE 1,000,000,000 11/8/2017 EUR 106.491 BASGR BASF SE XS1823502577 1.5 22-May-30 CALLABLE 500,000,000 5/15/2018 EUR 113.636 *callable 1-3mo before maturity @100, till then Make Whole (Green bar denotes green bond of the issuer) (* you can treat all bonds at due at maturity, and ignore callability) 1) (20 points) Which of these bonds look more attractive? Please recommend to your boss which bond(s) to buy and how many. (Assume no prior position in BASF credit) 2) (15 points) What are the main risks associated with this position? How would you protect your position from the moves in interest rates. Please provide the hedge specifics (notional, maturity, direction, etc) where possible. Is it a perfect hedge? Part II Outstanding Amount Px Currency (3Feb2021) Ticker Name ISIN Coupon Maturity Maturity Type Announced BASGR BASF SE XS1823502650 0.875 22-May-25 AT MATURITY 750,000,000 5/15/2018 EUR 104.744 BASGR BASF SE DE000A289DC9 0.25 5-Jun-27 CALLABLE 1,000,000,000 5/28/2020 EUR 102.167 BASGR BASF SE XS1718418103 0.875 25-Nov-27 CALLABLE 1,000,000,000 11/8/2017 EUR 106.491 BASGR BASF SE XS1823502577 1.5 22-May-30 CALLABLE 500,000,000 5/15/2018 EUR 113.636 *callable 1-3mo before maturity @100, till then Make Whole (Green bar denotes green bond of the issuer) (* you can treat all bonds at due at maturity, and ignore callability) 1) (20 points) Which of these bonds look more attractive? Please recommend to your boss which bond(s) to buy and how many. (Assume no prior position in BASF credit) 2) (15 points) What are the main risks associated with this position? How would you protect your position from the moves in interest rates. Please provide the hedge specifics (notional, maturity, direction, etc) where possible. Is it a perfect hedge? Part
