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PORTFOLIO AND TREASURY BOND FUTURES CONTRACT CHRACTERISTICS

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Question;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. PORTFOLIO AND TREASURY BOND FUTURES CONTRACT CHRACTERISTICS Security - Modified Duration - Basis Point Value - Conversion Factor for Cheapest to Deliver Bond - Portfolio Value/Future Contract Price Portfolio U.S Treasury bond futures contract - 10 year/ 8 years - $100,000 $75.32 ? Not applicable 1 - $100,000,000 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 much of the following would 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.

 

Paper#43811 | Written in 18-Jul-2015

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