You are a financial manager, and you have bonds worth $1,550,000 in your portfolio which have a 7 percent coupon rate and will be maturing in 10 years from now. The market rate is also 7 percent but is likely to either rise to 8% or fall to 6%. Suppose a call and put option on these bonds is available with an exercise price of $1,700,000. These contracts are available in standard contract sizes of 100 options per contract at a price of $5 per contract. Show the net impact of a change in market rates if options are used for hedging the exposure
You are a financial manager, and you have bonds worth $1,550,000 in your portfolio which have a 7 percent coupon rate and will be maturing in 10 years from now. The market rate is also 7 percent but is likely to either rise to 8% or fall to 6%. Suppose a call and put option on these bonds is available with an exercise price of $1,700,000. These contracts are available in standard contract sizes of 100 options per contract at a price of $5 per contract. Show the net impact of a change in market rates if options are used for hedging the exposure
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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You are a
portfolio which have a 7 percent coupon rate and will be maturing in 10
years from now. The market rate is also 7 percent but is likely to either
rise to 8% or fall to 6%. Suppose a call and put option on these bonds is available with
an exercise price of $1,700,000. These contracts are available
in standard contract sizes of 100 options per contract at a
price of $5 per contract. Show the net impact of a change in
market rates if options are used for hedging the exposure
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