A fund manager has a portfolio of two-year bonds with a total face value of $30 million.
Fantastic news! We've Found the answer you've been seeking!
Question:
Required:
(a). Identify what type of financial risk the fund manager is exposed to. Briefly explain. Please type your answers.
(b). Determine the duration-based optimal number of TYS contracts for hedging the risk of an interest rate rise. Also clearly state if any position in the futures contract should be “long” or “short”. You may need to create a table to show your answers. (Note: Fractional contract is NOT allowed, and round to the nearest integer.)
(c). Show the impact of the hedge if all yields drop instantaneously to 7% from 8% by calculating i) profit / loss from the futures position as outlined in part a), and ii) the change
in the value of the bond portfolio of two-year bonds.
Related Book For
Introduction to Operations Research
ISBN: 978-1259162985
10th edition
Authors: Frederick S. Hillier, Gerald J. Lieberman
Posted Date: