## Question

# At date t, the portfolio P to be hedged is a portfolio of Treasury bonds with various possible maturities. Its characteristics are as follows: Value

At date t, the portfolio P to be hedged is a portfolio of Treasury bonds with various possible

maturities. Its characteristics are as follows:

Value YTM MD Convexity

$1,450 6% 4.25 55

We consider Treasury bonds as hedging assets, with the following features:

Bond Price ($) Coupon Maturity YTM MD Convexity

Bond 1 108 6% 3 years 3.16% 2.75 10.48

Bond 2 118 5% 4 years 0.45% 3.73 18.15

Coupon frequency and compounding frequency are assumed to be annual. Face value of the

three bonds is assumed to be $100.

What are the quantities of the hedging assets that we have to consider to hedge the portfolio P?

Explain every equation you write. Why is it important to satisfy the conditions that you write for

perfect immunization?

## Step by Step Solution

There are 3 Steps involved in it

### Step: 1

To hedge portfolio P we need to ensure that the duration and convexity of the hedged portfolio match those of portfolio P This involves finding the appropriate quantities of the hedging assets Bond 1 ...### Get Instant Access to Expert-Tailored Solutions

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### Step: 2

### Step: 3

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