D4 Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percentTreasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are fundedby $100 million 5-year, 5 percent fixed rate GICS and equity. On the advice of its chief financialofficer, Allright wants to hedge the balance sheet with T-bond option contracts. The underlyingbonds currently have a duration of 8.82 years and a market value of $97,000 per $100,000 facevalue. Further, the delta of the options is 0.5. What type of contract, and how many contracts shouldAllright use to hedge this balance sheet?puts; 447 contracts.calls; 625 contracts.puts; 625 contracts.calls; 447 contracts.puts; 206 contracts.O OO O O

Hedge refers to the risk management strategy employed to cover the loss in investments by opting for…

Answered: O puts; 625 contracts.

Business

Finance

O puts; 625 contracts.

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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Concept explainers

Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.

Question

Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent
Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded
by $100 million 5-year, 5 percent fixed rate GICS and equity. On the advice of its chief financial
officer, Allright wants to hedge the balance sheet with T-bond option contracts. The underlying
bonds currently have a duration of 8.82 years and a market value of $97,000 per $100,000 face
value. Further, the delta of the options is 0.5. What type of contract, and how many contracts should
Allright use to hedge this balance sheet?
puts; 447 contracts.
calls; 625 contracts.
puts; 625 contracts.
calls; 447 contracts.
puts; 206 contracts.
O OO O O

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