A fund manager anticipates purchasing 800 of a AA rated corporate bond with a face value of
Question:
A fund manager anticipates purchasing 800 of a AA rated corporate bond with a face value of $1,000, 3% coupon rate, 12 years of maturity, a modified duration of 10.78 and forward price of $1,079 in 3 months. The manager is afraid that in the meantime interest rates might fall and the bond's price rises. There are no forward or futures contracts available for the bond, but the manager decides to hedge against interest rate movements using a T-bond futures contract quoted with $84.07 for each $100 face value, par of 100,000, and modified duration of 6.95.
How many futures contracts should the manager buy/sell? Indicate a short hedge with a negative sign if needed.
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim