Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 17, Problem 22PS
Summary Introduction

Adequate information:

Current total bond portfolio value = $1 million

Modified duration of portfolio to be hedged= 8 years

Modified duration of T-bonds to be used as hedge= 10 years

To construct:

Hedging strategy to minimize the risk of position

Introduction:

Hedging strategy is used to minimise the risk of the portfolio. 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.

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