A Money Manager Holds $50 Million Worth of Top-Quality International

question 23

Essay

A money manager holds $50 million worth of top-quality international bonds denominated in dollars. Their face value is $40 million, and most issues are highly illiquid. She fears a rise in U.S. interest rates and decides to hedge, using U.S. Treasury bond futures. Why would it be difficult to achieve a perfect hedge (list the various reasons)?

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Definitions:

Law of Demand

A fundamental principle in economics that describes the inverse relationship between the price of a good or service and the quantity demanded by consumers, holding other factors constant.

Quantity Demanded

The aggregate quantity of a product or service buyers are prepared to buy at a certain price point, within a specific timeframe.

Demand

The desire to purchase goods and services backed by the ability and willingness to pay, at a given price level within a specific time period.

Quantity Demanded

refers to the total amount of a good or service that consumers are willing and able to purchase at a specific price level in a given period.