Mr. Toriop manages a bond portfolio valued at $27,492,045. The bonds in this portfolio have a face value of $25 million. The portfolio has a yield of 8.35 percent and a duration of 7.67. Mr. Toriop is worried that interest rates will rise within the next year. He would like to lower the duration of your bond portfolio to 5 years. He finds a one-year bond futures contract and thinks that it would be an appropriate hedge for your portfolio. This futures contract is priced at 109 17/32, has an implied yield of 8 percent, and has an implied duration of 7.9 years. The futures contract size is $100,000. Suppose that the portfolio’s value falls to $26,557,089, and the futures price turns out to be 103 8/32 in one year’s time. What is the net profit from the hedged position?
Mr. Toriop manages a bond portfolio valued at $27,492,045. The bonds in this portfolio have a face value of $25 million. The portfolio has a yield of 8.35 percent and a duration of 7.67. Mr. Toriop is worried that interest rates will rise within the next year. He would like to lower the duration of your bond portfolio to 5 years. He finds a one-year bond futures contract and thinks that it would be an appropriate hedge for your portfolio. This futures contract is priced at 109 17/32, has an implied yield of 8 percent, and has an implied duration of 7.9 years. The futures contract size is $100,000. Suppose that the portfolio’s value falls to $26,557,089, and the futures price turns out to be 103 8/32 in one year’s time. What is the net profit from the hedged position?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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D & R A1 9 - 3
Question 9. Price Sensitivity Hedge
Mr. Toriop manages a bond portfolio valued at $27,492,045. The bonds in this portfolio have a face value of $25 million. The portfolio has a yield of 8.35 percent and a duration of 7.67. Mr. Toriop is worried that interest rates will rise within the next year. He would like to lower the duration of your bond portfolio to 5 years. He finds a one-year bond futures contract and thinks that it would be an appropriate hedge for your portfolio. This futures contract is priced at 109 17/32, has an implied yield of 8 percent, and has an implied duration of 7.9 years. The futures contract size is $100,000.
- Suppose that the portfolio’s value falls to $26,557,089, and the futures price turns out to be 103 8/32 in one year’s time. What is the net profit from the hedged position?
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