Suppose that without an adjustment for the relationship between the yield on a bond to be hedged and the yield on the hedging instrument the hedge ratio is 1.30.
Answer the below questions.
(a) Suppose that a yield beta of 0.8 is computed. What would the revised hedge ratio be?
(b) Suppose that the standard deviation for the bond to be hedged and the hedging instrument are 0.09 and 0.10, respectively. What is the pure volatility adjustment, and what would be the revised hedge ratio?