Consider a multi-factor key rate model with key rates being YTM on 2, 5, 10, and...

 

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Consider a multi-factor key rate model with key rates being YTM on 2, 5, 10, and 30-year par ponds. In lectures, we have shown that the price p(x) of a T-year par dp. 100 bond, where y is the bond's YTM, satisfies V 1. Assume today the YTM 1+] for 2-, 5-, 10-, and 30-year par bonds are 3%, 5%, 8%, and 12% respectively. Assume also that allbonds have a $100 face value. a) (6 points) Find KR012, KR015, KR01 10, and KR01 30 for 2, 5, 8, 10, 15, and 30-year par bonds. Please, show your calculations and enter your answers in the table below. Keep at least 4 decimal digits. 2 years 5 years 8 years Maturity of a par bond 10 years 15 years 30 years KR012 KR015 KR0110 KR0130 b) (3 points) You have a portfolio of 1000 of 15-year par bonds which you want to hedge using 2, 5, 10, and 30-year par bonds. How many of each of these bonds you should buy or sell to construct the best hedge? Round your answer to the nearest integer number of bonds c) (3 points) Assume you still have a portfolio of 1000 of 15-year par bonds but 10-year bonds are not available now. You still want to hedge your position using 2, 5, 8, and 30-year par bonds. Can you hedge all of your key rate risks? If yes, find how many bonds of each type you need to buy or sell (round your answer to the nearest integer). If no, explain why. Consider a multi-factor key rate model with key rates being YTM on 2, 5, 10, and 30-year par ponds. In lectures, we have shown that the price p(x) of a T-year par dp. 100 bond, where y is the bond's YTM, satisfies V 1. Assume today the YTM 1+] for 2-, 5-, 10-, and 30-year par bonds are 3%, 5%, 8%, and 12% respectively. Assume also that allbonds have a $100 face value. a) (6 points) Find KR012, KR015, KR01 10, and KR01 30 for 2, 5, 8, 10, 15, and 30-year par bonds. Please, show your calculations and enter your answers in the table below. Keep at least 4 decimal digits. 2 years 5 years 8 years Maturity of a par bond 10 years 15 years 30 years KR012 KR015 KR0110 KR0130 b) (3 points) You have a portfolio of 1000 of 15-year par bonds which you want to hedge using 2, 5, 10, and 30-year par bonds. How many of each of these bonds you should buy or sell to construct the best hedge? Round your answer to the nearest integer number of bonds c) (3 points) Assume you still have a portfolio of 1000 of 15-year par bonds but 10-year bonds are not available now. You still want to hedge your position using 2, 5, 8, and 30-year par bonds. Can you hedge all of your key rate risks? If yes, find how many bonds of each type you need to buy or sell (round your answer to the nearest integer). If no, explain why.

Answer rating: 100% (QA)

a To find the key rate durations KR0T for the given par bonds we can use the following formula KR0T dPdy 1 y Where dPdy is the derivative of the bond price with respect to the yield to maturity YTM an... View the full answer