What is the effect of this on the performance of the hedge

Assignment Help Financial Management

Reference no: EM131989978

A portfolio manager plans to use a Treasury bond futures contract to hedge a bond portfolio over the next three months. The portfolio is worth $100 million and will have a duration of 4.0 years in three months. The futures price is 122, and each futures contract is on $100,000 face value of bonds. The bond that is expected to be cheapest to deliver will have a duration of 9.0 years at the maturity of the futures contract.

a) What position in futures contract is required?

b) What adjustments to the hedge are necessary if after one month the bond that is expected to be cheapest to deliver changes to one with a duration of seven years?

c) Suppose that all rates increase over the three months, but long-term rates increase less than short-term and medium-term rates. What is the effect of this on the performance of the hedge?

Reference no: EM131989978

Questions Cloud

Bachelors degree-accepted job offer at your dream company : You just graduated college with your Bachelors Degree and accepted a job offer at your dream company.

What is the straight debt value of this convertible bond : what is the investor’s expected rate of return upon conversion? what is the straight debt value of this convertible bond?

The current yield-to-maturity of bonds of equal risk : The current yield-to-maturity of bonds of equal risk, but without warrants is 15%. What is the value of each warrant?

What is the minimum number of bonds the firm : What is the minimum number of bonds the firm must sell to raise the money it needs? Use annual compounding.

What is the effect of this on the performance of the hedge : What position in futures contract is required? What is the effect of this on the performance of the hedge?

What is ace net advantage to leasing : What is Ace’s present value of the cost of leasing? What is Ace’s Net Advantage to Leasing (NAL)?

What is implicit interest in dollars first year of bond life : The bond matures in 21 years. What is the implicit interest, in dollars, for the first year of the bond's life?

Use degree of financial leverage formula to calculate DFL : Calculate the operating breakeven point in units. Use the degree of financial leverage (DFL) formula to calculate DFL.

Company policy to always maintain constant growth rate : If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

User Account

All Pages