Adjusting the naive hedge for relative duration and

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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
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