frm level test question

shah.vishal
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Posts: 11
Joined: Fri Mar 15, 2013 3:12 pm

frm level test question

Postby shah.vishal » Sun May 12, 2013 9:36 pm

A bond trader has bought a position in Treasury Bonds with a 4% annual coupon rate on February 15, 2015. The DV01 of the position is USD 80,000. The trader decides to hedge his interest rate risk with the 4.5% coupon rate Treasury Bonds maturing on May 15, 2017 which has a DV01 of .076 per USD 100 face value. To implement this hedge, approximately what face amount of the 4.5% Treasury bonds maturing on May 15, 2017 should the trader sell?
Please explain the steps

vnraghuveer
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Posts: 20
Joined: Mon Apr 08, 2013 1:36 pm

frm level test question

Postby vnraghuveer » Tue May 14, 2013 9:40 am

The hedge ratio = (DV01 of the initial position to be hedged)/(DV01 of the position used to hedge) = 80,000/0.076 = 1,052,631. So the face value of the bonds to be shorted = $ 1.052 million


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