Question: Suppose that an institutional investor wants to hedge a portfolio
Suppose that an institutional investor wants to hedge a portfolio of mortgage pass-through securities using Treasury bond futures contracts. What are the risks associated with such a hedge?
Answer to relevant QuestionsThe following excerpt appeared in the following article, “Duration,” in the November 16, 1992, issue of Derivatives Week, p. 9: “TSA Capital Management in Los Angeles must determine duration of the futures contract it ...Suppose that an investor purchased a Eurodollar futures contract at an index price of 95.00. At the settlement date, suppose that the settlement price is 95.40. Explain whether the buyer or the seller of the futures contract ...“I don’t understand how portfolio managers can calculate the duration of an interest-rate option. Don’t they mean the amount of time remaining to the expiration date?” Respond to this question. Determine the price of a European put option on a 6.5% four-year Treasury bond with a strike price of 100.25 and two years to expiration assuming the same information as in Exhibit 30-10. Suppose that a dealer quotes these terms on a five-year swap: fixed-rate payer to pay 4.4% for LIBOR and fixed-rate receiverto pay LIBOR for 4.2%. Answer the below questions. (a) What is the dealer’s bid-asked spread? (b) ...
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