Determine the outcome of the hedge

Assignment Help Finance Basics

Reference no: EM131937446

Question: Assume you plan to issue $1,000,000 in long-term bonds in October 2017. You are worried that interest rates will be 1% higher by then. The current yield-to-maturity on 30-year T-Bonds is 6.74%. There are October 2107 expiration T-Bond options available with pricing information shown below. The specifications for the options contracts are: one option contract is for $100,000 of 8% coupon, 30-year T-Bonds.

Call Premium Strike Put Premium

3.25 114 1.00

2.30 115 1.70

1.75 116 2.50

1.00 117 3.00

.50 118 3.60

Using T-Bond options, develop a strategy to hedge this risk. This should include number of option contracts, buy or sell, put or call and a strike price.

Determine the outcome of the hedge if, in fact, interest rates increase by 1% by October 2017. Did the hedge succeed in locking in today's lower interest rate?

Hints: 1. A strike of 114 correlates to a bond priced at $1,140. 2. You need to use the current YTM of 6.74% on T-Bonds and figure out a bond price given the T-Bond option specifications. This would be your spot price.

Reference no: EM131937446

Questions Cloud

Explain the some of the ethical issues that nike is facing : From Nike's standpoint, is this a fair assessment of their ethical standards? Explain the some of the ethical issues that Nike is facing in the case.

Discuss the use of javascript in the context of html : Discuss the use of JavaScript in the context of HTML. Based on CAT 1, style the output of your CAT 1 as much as possible using external CSS only.

Spent on purchasing the new technology : What is the maximum amount that should be spent on purchasing the new technology?"

Convert the cost of installing solar panel to annual cost : how many square feet of solar panels should be installed? You should convert the cost of installing the solar panel to an annual cost."

Determine the outcome of the hedge : Determine the outcome of the hedge if, in fact, interest rates increase by 1% by October 2017. Did the hedge succeed in locking in today's lower interest rate?

Elements of starbucks organizational culture : Suggest the key elements of Starbucks' organizational culture that contributes to its success in a global economy.

What is ethically justifiable course of action for health : What is the ethically justifiable course of action for public health officials? Which ethical and other factors are relevant to these decisions?

How using your voice as communication tool affects your job : Write about given topic. The topic is how using your voice as a communication tool affects your job. Need 2-3 Slides on the same

What is the reward-to-volatility ratio : What is the reward-to-volatility ratio (S) of your risky portfolio and your client's portfolio? (Do not round intermediate calculations).

User Account

All Pages