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3. June Klein, CFA, manages a $100 million (market value) U.S. government bond portfolio for an institution. She anticipates a small parallel shift in the yield curve and wants to fully hedge the portfolio against any such change. Security Modified Duration Basis Point Value Conversion Factor for Cheapest to Deliver Bond Portfolio Value/ Future Contact Price Portfolio 10 Years $100,000.00 Not Applicable $100,000,000.00 U.S. Treasury bond futures contract 8 Years $75.32 1 94-05 a. Discuss two reasons for using futures rather than selling bonds to hedge a bond portfolio. No calculations required. b. Formulate Klein's hedging strategy using only the futures contract shown. Calculate the number of futures contracts to implement the strategy. Show all calculations. c. Determine how each of the following should change in value if interest rates increase by 10 basis points as anticipated. Show all calculations. (1) The original portfolio (2) The Treasury bond futures position (3) The newly hedged portfolio d. State three reasons why Klein's hedging strategy might not fully protect the portfolio against interest rate risk. e. Describe a zero-duration hedging strategy using only the government bond portfolio and options on U.S. Treasury bond futures contracts. No calculations required.
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $40,000 per year forever. If the required return on this investment is 6.30 percent, how much will you pay for the policy?
What is the yield to call, if they are called in 5 years? Round your answer to two decimal places.
You earned 26.3 percent on your investments for a time period when the risk-free rate was 3.8 percent and the inflation rate was 3.1 percent. What was your real rate of return for the period?
an unlevered firm has a value of 500 million. an otherwise identical but levered firm has 50 million in debt. under the
In the spot market, 1 U.S. dollar equals 1.68 Canadian dollars. Six month Canadian securities have an annual return of 12%. Six month U.S. securities have an annualized return of 7.5%.
Is Porter's five-factor model the best framework to use to evaluate the competitive environment of an industry? Why or why not?
The primary users of external financial reports are; If a company has $15,000 in assets and $10,000 in equities, then liabilities are
The company's tax rate is 35% Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the tax effect of selling the old machine?
jb corporation has a retained earnings balance of 1000000. the company reported net income of 200000 sales of 2000000
A 6-month put option on Makler Corp.'s stock has a strike price of $47.50 and sells in the market for $8.90. Makler's current stock price is $41.00. What is the exercise value of the option?
However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in ..
Your friend tells you he has a very simple trick for shortening the time it takes to repay your mortgage by one-third: Use your holiday bonus to make an extra payment on January 1 of each year (that is, pay your monthly payment due on that day twice)..
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