37UIUC%20FIN%20300%20Coupon%20Bond%20Duration%20Hedge%20Practice%20Problems%20%28Answers%29%20FA%200

37UIUC%20FIN%20300%20Coupon%20Bond%20Duration%20Hedge%20Practice%20Problems%20%28Answers%29%20FA%200

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UNIVERSITY OF ILLINOIS College of Business - Department of Finance - Finance 300 (Financial Markets) Professor James Jackson # Bonds (t periods) Coupon (C$) PV (C$) Duration (D i ) Convexity (C i ) 1000 1 $50.00 $49.02 0.0440 0.0880 2 $50.00 $48.06 0.0863 0.2588 3 $50.00 $47.12 0.1269 0.5074 4 $50.00 $46.19 0.1658 0.8291 Face Value $1,000.00 $923.85 3.32 16.58 Bond Price (∑ PVCF) = $1,114.23 ∑/2 = Duration (Years) ∑/4 =Convexity (Years 2 ) 1.870 4.566 Years to Maturity Coupon Rate Market Rate (YTM %) Current Yield Modified Duration Price Change (MD Only) Modified Convexity Price Change per + 1.00% YTM 2.00 10.00% 4.00% 8.97% -1.833% -$20.42 2.19 -$20.18 Futures Contract Face Contract $ per 1/32% YTM % $100,000.00 $31.25 + 1.00% 1. Portfolio $ change per + 1.00% YTM? [1000 bonds] *[ -$20.18] = -$20,180.00 2. Hedge Ratio? [ -$20,180.00 / ( $ 31.25 * ( 32 /32 ))] = -20.18 ** 3. Number of Futures Contracts? –20.00 Contracts (Rounded Hedge Ratio) 4. Long or Short Futures? Short ( Opposite Direction of YTM ∆29 5. Initial Margin per Contract ($). $2,700.00 (Set by the CBOT (t=0)) 6. Total Initial Margin Required ($)? $2,700.00
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37UIUC%20FIN%20300%20Coupon%20Bond%20Duration%20Hedge%20Practice%20Problems%20%28Answers%29%20FA%200

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