How much notional principal would you want the swap to have

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Reference no: EM132174185

Question -

1. Suppose that you are offered a 12% fixed-rate payment over the next 15 years. The duration of the swap is 26.4. You are managing a firm with $3.7 million of assets and a duration gap of 1.7 years. How much notional principal would you want the swap to have?

2. Suppose that the pension fund you are managing is holding $60 million of five-year bonds, and if their interest rates fall by 1%, the bonds rise in price by 4.3 points. When the interest rates fall by 1%, the five-year Treasury bond contract rises by 5.7 points. The interest rate on five-year Treasury bonds on average changes by 1.30 when the interest rate on the Treasury bond futures contract changes by 1 point. The value of the future contract is$125,000per five-year Treasury bond. What should you do in the option market to hedge the interest-rate risk on the $60 million of five-year bonds?

Reference no: EM132174185

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