
a)
To compute: The number of put option bonds are required to hedge portfolio of bond.
a)

Explanation of Solution
The computation of number of put option bond is as follows:
b)
To compute: The anticipated gain or loss in the hedge on the put option.
b)

Explanation of Solution
The computation of gain or loss is as follows:
A $100,000 20year, 8% bond vending at $96,157 indicates 8.4% yield.
Hence, the gain from the put option hedge is $4,614,028.
c)
To discuss: The anticipated change in the market value of portfolio of bond.
c)

Explanation of Solution
The computation of change in market value of portfolio of bond is as follows:
Hence, the change in bond is $4,629,630.
d)
To discuss: Whether the payoff of hedge set off cost of placing the hedge.
d)

Explanation of Solution
The computation of payoff of hedge is as follows:
Hence the payoff of hedge is 0.58%.
e)
To discuss: Whether the gain on the portfolio bonds set off cost of placing the hedge.
e)

Explanation of Solution
The computation of gain from the bond portfolio is as follows:
Hence the gain from bond is -0.58%.
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Chapter 23 Solutions
Financial Markets and Institutions
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