Chapter 17, Problem 23PS

Summary Introduction

Adequate information:

Value of the bonds = $10 million

Years to maturity = 10 years

Modified duration = 8 years

Future value of T-note = F0 = 100

Modified duration of T-note = 6 years

Bond and the contract are at par value

To construct:

Futures contract to hedge risk surrounding the yield

Introduction:

A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.