Question:
Smiler will issue $25m of 20 year par debt in 9 months. Ng is concerned that i rates can fluctuate and wants to hedge the i rate risk by using T bond futures. Fut price is $75,287 with a dur of 7.11. Ng has also run a regression of yields on 20 year corp bonds comparable to this new issue vs T bonds and finds a stable regression of 1.05.
How many futures contracts need to be transacted to hedge.
Answer below…
Stop peeking…
(0 - 9.9)/7.11 * 25m/75,287 * 1.05 = 485.48
My quesiton is where in the h*** does 9.9 as a corp bond duration come from? There really is no more info in the passage. Is this simply a typo and Schweser has forgotten to put the main bond duration in the question??