An investor owns 50 Million Euro of a bond issued by Vodafone: Vodafone 2,5% 2027 (Price =105% and Modified duration= 6,5) and decides to hedge the credit risk with the Main Index 5 years (maturity March 2025).

Data:

a-Main index trades 0,53%-0,55% (coupon 100bps)

b-Main Index DV01=0,055% and PV01=5,3

1-What transaction should be initiated? 

2-Calculate the initial fee? Precise if paid or received by the investor?

3-What are the risks associated with this hedge?

4-If the historical beta between the Vodafone Credit spread and the Main index is 2, how would you adjust the hedging (new hedging ratio)?

Answer rating: 100% (QA)

Solution We need to calculate the initial fee First we calculate the yield spread between the Vodafo... View the full answer