4. At date to the portfolio P to be hedged is a portfolio of Treasury bonds...
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4. At date to the portfolio P to be hedged is a portfolio of Treasury bonds with various possible maturities. Its characteristics are as follows: Price YTM MD $28,296,919 7.511% 5.906 Convexity 67.578 We consider Treasury bonds as hedging assets, with the following features: T-Bonds Prices ($) Coupon Rates Maturities Bond 1 108.039 7% 3 years Bond 2 118.786 8% 7 years Bond 3 97.962 5% 12 years Coupon frequency and compounding frequency are assumed to be annual. At date t we want the hedging portfolio to have opposite value of the portfolio to be hedged. (1) What is the number of hedging instruments necessary to implement a modified duration/convexity hedge? (2) Compute the YTM, modified duration and convexity of the three hedging assets. (3) Which quantities Q1, Q2 and 3 of each of the hedging asset 1, 2, 3 do we have r to hedge the portfolio P? 4. At date to the portfolio P to be hedged is a portfolio of Treasury bonds with various possible maturities. Its characteristics are as follows: Price YTM MD $28,296,919 7.511% 5.906 Convexity 67.578 We consider Treasury bonds as hedging assets, with the following features: T-Bonds Prices ($) Coupon Rates Maturities Bond 1 108.039 7% 3 years Bond 2 118.786 8% 7 years Bond 3 97.962 5% 12 years Coupon frequency and compounding frequency are assumed to be annual. At date t we want the hedging portfolio to have opposite value of the portfolio to be hedged. (1) What is the number of hedging instruments necessary to implement a modified duration/convexity hedge? (2) Compute the YTM, modified duration and convexity of the three hedging assets. (3) Which quantities Q1, Q2 and 3 of each of the hedging asset 1, 2, 3 do we have r to hedge the portfolio P?
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