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You own $10 million of the 8% (semiannual), 10 year Treasury bond priced at par to...

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Finance

  1. You own $10 million of the 8% (semiannual), 10 year Treasurybond priced at par to yield 8% annually. You want to hedge yourposition against an increase in yields using the 8% (semiannual),10 year Treasury bond future. There are no transaction costs.Recall the negative relation between market yields and bond prices.
    1. How many Treasury bond futures do you need to hedge theposition?
    2. Compute and plot the profit & loss on the same diagram(long Treasury bond and Treasury bond future) varying the price ofthe bond as market yields range from 7.0 to 9.0% at 1/16 pointintervals. YTM defines the x-axis.

Answer & Explanation Solved by verified expert
4.3 Ratings (582 Votes)
Since the payment frequency yield and maturity of both theunderlying treasury bonds and hedge futures contract arematching we can match the total value of the bond portfolioexactly with the futures contract The portfolio is long ontreasury bonds Hence the offsetting hedge position would be toshort sell the futures contract worth 10 M Each futurescontract has a face value at maturity of 10000 Since the bondsare priced at par the no of contracts to be sold 10000000100000 100 contractsSettlementMaturityPeriod yrsYieldCouponPayment    See Answer
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You own $10 million of the 8% (semiannual), 10 year Treasurybond priced at par to yield 8% annually. You want to hedge yourposition against an increase in yields using the 8% (semiannual),10 year Treasury bond future. There are no transaction costs.Recall the negative relation between market yields and bond prices.How many Treasury bond futures do you need to hedge theposition?Compute and plot the profit & loss on the same diagram(long Treasury bond and Treasury bond future) varying the price ofthe bond as market yields range from 7.0 to 9.0% at 1/16 pointintervals. YTM defines the x-axis.

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