Allright Insurance Has Total Assets of $140 Million Consisting of $50

question 64

Multiple Choice

Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.
-On the advice of its chief financial officer, Allright wants to hedge the balance sheet with T-bond option contracts. The underlying bonds currently have a duration of 8.82 years and a market value of $97,000 per $100,000 face value. Further, the delta of the options is 0.5. What type of contract, and how many contracts should Allright use to hedge this balance sheet?

• A)puts; 447 contracts.
• B)calls; 625 contracts.
• C)puts; 625 contracts.
• D)calls; 447 contracts.
• E)puts; 206 contracts.

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