Forwards & Futures -2 - Pristine Quiz

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Joined: Sat Sep 22, 2012 3:00 pm

Forwards & Futures -2 - Pristine Quiz

Postby maheshnath » Sat Oct 27, 2012 6:47 pm

The below question is from the online Pristine Quiz, answer is not understood.
Can you pls provide all the values of the formula as explained below. I'm unable to understand the solution..Thanks

Hanwha Investment is underwriting a 30-year zero coupon corporate bond issue with a face value of $50 million and a current market value of $2,676,776 (a yield of 5% per six-month period). The firm must hold the bonds for a few days before issuing them to the public, which exposes them to interest rate risk. Hanwha Investment wishes to hedge its position by using T-bond futures contracts. The current T-bond futures price is $90.80 per $100 par value, and the T-bond contract will be settled using a 20-year, 8% coupon bond paying interest semiannually. The contract is due to expire in a few days, so the T-bond price and the T-bond futures price are virtually identical. Assume that the yield curve is flat and that the corporate bond will continue to yield 0.5% more that T-bond per six-month period, even if the general level of market rates should change. What hedge ratio should Hanhwa Investment use to hedge its bond holdings against possible interest rate fluctuations over the next few days?
Choose one answer.
a. 72 contracts held short to hedge
b. 85 contracts held short to hedge
c. 88 contracts held short to hedge
d. 93 contracts held short to hedge
The correct answer is: 88 contracts held short to hedge.

Hedge ratio = (duration of portfolio) x Market value of portfolio)/ (Duration of futures contract x (90.80*100)).
The duration of the futures contract = duration of underlying bond, given information provided in the problem.


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Re: Forwards & Futures -2 - Pristine Quiz

Postby content.pristine » Wed Oct 31, 2012 5:40 pm


This post has already been answered at:


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