You hold a bond portfolio that consists of (i) a 4-year bond with a face value of $100 that pays an annual coupon of 10%, and (ii) a 2-year bond with a face value of $100 that pays an annual coupon of 20%. The yield curve is flat at ???? = 5%. You are worried about fluctuations in the price of your portfolio. Explain how you can hedge your risk using 3-year zero-coupon bonds with a face value of £100.

Answer rating: 100% (QA)

To hedge the risk of fluctuations in the price of your bond portfolio you can use 3year zerocoupon bonds Hedging involves taking offsetting positions ... View the full answer