An FI has a $100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at par and have a duration of five years. The FI wishes to hedge the portfolio with T-bond options that have a delta of –0.625. The underlying long-term Treasury bonds for the option have a duration of 10.1 years and trade at a market value of $96,157 per $100,000 of par value. Each put option has a premium of 3.25 (percent of $100,000). Bonds put options are necessary to hedge the bond 824How far must interest rates move before the payoff on the hedge will exactly offset the cost of placing the hedge?How far must interest rates move before the gain on the bond portfolio will exactly offset the cost of placing the hedge?If interest rates increase 100 basis points, what is the expected gain or loss on the put option hedge?

An Overview of the Hedge's Functions Taking out an insurance policy is a lot like hedging, in a…

Answered: An FI has a $100 million portfolio of…

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

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An FI has a $100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at par and have a duration of five years. The FI wishes to hedge the portfolio with T-bond options that have a delta of –0.625. The underlying long-term Treasury bonds for the option have a duration of 10.1 years and trade at a market value of $96,157 per $100,000 of par value. Each put option has a premium of 3.25 (percent of $100,000). Bonds put options are necessary to hedge the bond 824
How far must interest rates move before the payoff on the hedge will exactly offset the cost of placing the hedge?
How far must interest rates move before the gain on the bond portfolio will exactly offset the cost of placing the hedge?
If interest rates increase 100 basis points, what is the expected gain or loss on the put option hedge?

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