Assume Google is a large-scale issuer of 10 year debt with a face value of $100 Billion at Par, an average duration of 8 years, and an average coupon of 4%, that it has a strategic equity portfolio of tech companies with a market cap of $20 billion and a beta to the NASDAQ 100 of 1.8, that spends $50 million per year on heating oil and $20 million on natural gas for air conditioning such that each $1 rise in oil prices costs it 500K and each $0.01 rise in natural gas costs it 30K. Assume it can hedge its exposure to rising rates using 10 year futures contracts with a cheapest to deliver bond duration of 5, and hedge its stock portfolio using E-mini Nasdaq 100 or puts on ETF QQQ and can use Crude Oil futures to hedge its heating costs and Natural Gas future to hedge its air conditioning costs.


What strategy do you recommend to completely hedge each of these risks using each of the instruments available? How many of each instrument should they buy or sell? Use and footnote the dates and prices of the hedging instruments used in your answer.

Answer rating: 100% (QA)

To completely hedge each of the risks Google can use the following instruments Hedging Interest Rate Risk Google can use 10year Treasury futures contracts to hedge its exposure to rising rates The fut... View the full answer