Assuming we need to fully hedge, how can we do so by using the formula in derivatives [(MD target - MD portfolio)/MD swap] x MV of portfolio?
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Target duration is zero.
Could you please guide me where did I go wrong below?
Currently the portfolio is over hedged (based on MD), so applying the formula,
[(0 - 16.4)/17.51] x 289m = -270m notional principle
But, the answer in the example states 392 million…
BPV of liabilities is USD1.215M
BPV of assets is USD 528k
BPV of (assets less liabilities) is -USD687k
BPV of swap is 0.1751/USD100 of notional principal
so need 687/1.751=392k of notional principal
Same answer using duration:
Liabilities 1.321*9.2= 12.1532
Fixed Income 1.032 * 0.20 * 25.6= 5.28384
subtract these
12.1532-5.28384= 6.86936
divide by effective duration of swap
6.86936/17.51=0.392
how did you get 1.751? shouldn’t it be 0.001751? Also, the answer is 392 million
There’s a whole bunch of typos in there because I did it at high speed.
The important thing is you now know how to do the question.
thank you!
I have a question in this formula, can we solve it using this formula instead
[(MD target - MD portfolio) / MD swap] x MV of portfolio?
How do we get the MV of portfolio here?