Question: Suppose that without an adjustment for the relationship between the yield on a bond to be hedged and the yield on the hedging instrument the

Suppose that without an adjustment for the relationship between the yield on a bond to be hedged and the yield on the hedging instrument the hedge ratio is 1.30.
Answer the below questions.
(a) Suppose that a yield beta of 0.8 is computed. What would the revised hedge ratio be?
(b) Suppose that the standard deviation for the bond to be hedged and the hedging instrument are 0.09 and 0.10, respectively. What is the pure volatility adjustment, and what would be the revised hedge ratio?

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a The revised hedge ratio would be the hedge ratio times the adjustment factor For the hedge ratio w... View full answer

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