Finance-Hedging Portfolio

An FI has a $100 million portfolio of 6 year Eurodollar bonds with an 8% coupon. The bonds are trading at par and have a duration of 5 years. The FI wishes to hedge the portfolio with T-bond options, which have a delta of -0.625. The underlying bonds on the option have a duration of 10.1 years and trade at $96157 per $100000 face value. Each put option has a premium of 3.25 (% of $100000).

 

Don't use plagiarized sources. Get Your Custom Essay on
Need an answer from similar question? You have just landed to the most confidential, trustful essay writing service to order the paper from.
Just from $11/Page
Order Now

How many put options are needed to hedge the portfolio?

 

If interest rates increase by 1%, what’s the expected gain or loss on the puts?

 

If interest rates increase by 1%, what’s the expected change in market value?

 

How far must interest rates move before the gain on the bond portfolio offsets the cost of the hedge?