A pension fund manager anticipates the purchase of a 20-year, 8 percent coupon Treasury bond at the
Question:
a. What is the pension fund manager's interest rate risk exposure?
b. How can the pension fund manager use options to hedge this interest rate risk exposure?
c. What prices are possible on the 20-year T-bonds at the end of year 1 and year 2?
d. Diagram the prices over the two-year period.
e. If options on $100,000, 20-year, 8 percent coupon Treasury bonds (both puts and calls) have a strike price of 101, what are the possible (intrinsic) values of the option position at the end of year 1 and year 2?
f. Diagram the possible option values. Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
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Related Book For
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
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