# Adjusting the naive hedge for relative duration and

This preview shows page 12. Sign up to view the full content.

Treasury portfolio is less than that of the futures contract. Adjusting the naive hedge for relative duration and relative yield volatility, we obtain the adjusted hedge position: 300 0 . 1 0 . 8 6 . 7 806 . 315 = × × contracts Situation B . Here, the treasurer seeks to hedge the purchase price of the bonds; this requires a long hedge. The market value of the bonds to be purchased is: \$20 million × 0.93 = \$18.6 million The duration ratio is 7.2/8.0, and the relative yield volatility is 1.25. Therefore, the hedge requires the treasurer to take a long position in: 330 25 . 1 0 . 8 2 . 7 330 , 63 000 , 600 , 18 = × × contracts 8. a.% change in T-bond price = modified duration × change in YTM = 7.0 × 0.50% = 3.5% b. When the YTM of the T-bond changes by 50 basis points, the predicted change in the yield on the KC bond is 1.22 × 50 = 61 basis points. Therefore: % change in KC price = modified duration × change in YTM = 6.93 × 0.61% = 4.23% 23-12
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern