2. The total assets of insurance company A amounts to $130 million consisting of $30 million in 4-year, 7 percent Treasury notes and $100 million in 15-year, 7.5 % fixed-rate Baa bonds. These assets are funded by $110 million 5-year, 5.5% fixed rate GICS and equity. The duration of the T-notes, Baa bonds, and GICS is 1.90 years, 7.2 years, and 5.0 years respectively. The CFO of insurance company A wants to hedge the B/S with T-bond option contracts. The underlying bonds have a duration of 8.43 years and a market value of $98,000 per $100,000 face value. In addition, the delta of the options is 0.4. What type of contract, and how many contracts should company A use to hedge this B/S?
2. The total assets of insurance company A amounts to $130 million consisting of $30 million in 4-year, 7 percent Treasury notes and $100 million in 15-year, 7.5 % fixed-rate Baa bonds. These assets are funded by $110 million 5-year, 5.5% fixed rate GICS and equity. The duration of the T-notes, Baa bonds, and GICS is 1.90 years, 7.2 years, and 5.0 years respectively. The CFO of insurance company A wants to hedge the B/S with T-bond option contracts. The underlying bonds have a duration of 8.43 years and a market value of $98,000 per $100,000 face value. In addition, the delta of the options is 0.4. What type of contract, and how many contracts should company A use to hedge this B/S?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:2. The total assets of insurance company A amounts to $130 million consisting of $30
million in 4-year, 7 percent Treasury notes and $100 million in 15-year, 7.5 % fixed-rate
Baa bonds. These assets are funded by $110 million 5-year, 5.5% fixed rate GICS and
equity.
The duration of the T-notes, Baa bonds, and GICS is 1.90 years, 7.2 years, and 5.0
years respectively.
The CFO of insurance company A wants to hedge the B/S with T-bond option contracts.
The underlying bonds have a duration of 8.43 years and a market value of $98,000 per
$100,000 face value. In addition, the delta of the options is 0.4. What type of contract,
and how many contracts should company A use to hedge this B/S?
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