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You currently hold a 7-year fixed rate bond 5% annually. You would like to hedge against changes in the level and the slope of the yield curve and you plan to use a 1-year zero coupon bond and a 7-year zero coupon bond. Use the following table to compute the adequate positions in the hedging instruments.
Maturity β1 β2 Z(t, 1)
1.00 1.1150 -0.2540 0.9800
2.00 0.9940 -0.3010 0.9600
3.00 0.9640 -0.1470 0.9300
4.00 0.9330 0.0080 0.8900
5.00 0.9300 0.1620 0.8500
6.00 0.9260 0.3160 0.8100
7.00 0.9270 0.4230 0.7700
8.00 0.9270 0.5300 0.7300
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