You Hold a $50 Million Portfolio of Par Value Bonds

question 37

Multiple Choice

You hold a $50 million portfolio of par value bonds with a coupon rate of 10% paid annually and 15 years to maturity.How many T-bond futures contracts do you need to hedge the portfolio against an unanticipated change in the interest rate of 0.18% Assume the market interest rate is 10% and that T-bond futures contracts call for delivery of an 8% coupon (paid annually) , 20-year maturity T-bond.

• A)398 contracts long
• B)524 contracts short
• C)1048 contracts short
• D)398 contracts short

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Definitions:

Market Price

The current price at which a good or service can be bought or sold in a market, determined by the forces of supply and demand.

Sacks

Bags made of various materials, typically used for storing or transporting items.

Profit Maximized

The point at which a firm's profit is at its highest because marginal cost equals marginal revenue.

Total Cost

The complete cost of production, including both fixed costs that do not change regardless of the output level and variable costs that increase or decrease with the level of production.