4. [8pts] Mr. Devine is a fixed-income portfolio manager. He forecast a cash outflow of $10...
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4. [8pts] Mr. Devine is a fixed-income portfolio manager. He forecast a cash outflow of $10 million in June and plans to sell his baseline bond portfolio. The fund currently is worth $10 million, has an "A" quality rating, duration of 7 years, weighted average maturity of 15 years, annual coupon rate of 10.25%, and YTM of 10.25% (note: the fund is selling at its par value). Suppose Mr. Devine is afraid that long-term interest rates could increase and decides to hedge his June sale by taking a position in June T-bond futures contracts when the June T-bond contract is trading at 80-16, and the T-bond most likely to be delivered on the contract has a YTM of 9.5%, maturity of 15 years, and a duration of 9 years. (1) [4pts] Using the price-sensitivity model, show how Mr. Devine could hedge his June bond portfolio sale against interest rate risk.(2) [4pts] Suppose long-term interest rates increase over the period such that at the June expiration, Mr. Devine's baseline portfolio (A-rated, 10.25% coupon rate, 15-year maturity, and 7-year duration) is trading at 96 of par, and the price on the expiring June T-bond contract (fr) is 76. Determine Mr. Devine's revenue from selling his baseline bond portfolio, his profit on the futures contracts, and his total revenue. 4. [8pts] Mr. Devine is a fixed-income portfolio manager. He forecast a cash outflow of $10 million in June and plans to sell his baseline bond portfolio. The fund currently is worth $10 million, has an "A" quality rating, duration of 7 years, weighted average maturity of 15 years, annual coupon rate of 10.25%, and YTM of 10.25% (note: the fund is selling at its par value). Suppose Mr. Devine is afraid that long-term interest rates could increase and decides to hedge his June sale by taking a position in June T-bond futures contracts when the June T-bond contract is trading at 80-16, and the T-bond most likely to be delivered on the contract has a YTM of 9.5%, maturity of 15 years, and a duration of 9 years. (1) [4pts] Using the price-sensitivity model, show how Mr. Devine could hedge his June bond portfolio sale against interest rate risk.(2) [4pts] Suppose long-term interest rates increase over the period such that at the June expiration, Mr. Devine's baseline portfolio (A-rated, 10.25% coupon rate, 15-year maturity, and 7-year duration) is trading at 96 of par, and the price on the expiring June T-bond contract (fr) is 76. Determine Mr. Devine's revenue from selling his baseline bond portfolio, his profit on the futures contracts, and his total revenue.
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1 To hedge his June bond portfolio sale against interest rate risk Mr Devine can take a short position in June Tbond futures contracts The first step ... View the full answer
Related Book For
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty
Posted Date:
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