Same bank as in #1. Now we are going to hedge the Bank’s Balance Sheet with 10y UST Bond Put Options. If the Put δ = 0.5, the Duration of the 10y UST is currently 8.3 and one 10y UST Bond has a value of $925 per $1000 principal, what number of Put options are expected to create the hedge?

Assume, whereas there is a 0.75% change to interest rates in all the Bank’s Balance Sheet Assets and Liabs, and a continued 8% YTM, assume the 10y UST experiences only a 0.5% change in rates with an underlying 7% YTM.

Show, given the stated Interest Rate change, that you have achieved this hedged result.

What is the effective reduction in Bank Equity variation by hedging, given the stated interest rate changes?

Answer rating: 100% (QA)

1 For a 075 increase in interest rates the new value of the banks assets would be Assets 1... View the full answer