Suppose the yield curve is flat at 8%. Consider 3- and 6-year zero-coupon bonds.You buy one 3-year

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Suppose the yield curve is flat at 8%. Consider 3- and 6-year zero-coupon bonds.You buy one 3-year bond and sell an appropriate quantity of the 6-year bond to durationhedge the position. Any additional investment is in short-term (zero-duration) bonds.
Suppose the yield curve can move up to 8.25% or down to 7.75% over the course of 1 day. Do you make or lose money on the hedge? What does the result tell you about the (impossible) flat yield curve model discussed in Section 25.2?
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Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

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