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
Related questions
Question
D4
![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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbc1a4721-e508-4b83-b4b1-5f6019ea6bc7%2F0ac41bc9-2c76-49a2-99f4-03f353fc66e0%2F3ifajae_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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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