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    Bond pricing, hedging using futures and forward, duration

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    1 Village Bank has $240 million of assets with a duration of 14 years and liabilities worth $210 million with a duration of 4 years. In the interest of hedging interest rate risk, Village Bank is contemplating a macrohedge with interest rate futures contracts now selling for 102-21. If the spot and futures interest rates move together, how many futures contracts must Village Bank sell to fully hedge the balance sheet? Assume that the hedge uses T-bond futures having $100,000 face value with a duration of 9.0 years

    2 An FI holds a 15-year, $1,000,000 par value bond that is priced at 105 with a yield to maturity of 5.5 percent. The bond has a duration of 10.42 years, and the FI plans to sell it after two months. What is the current price of the bond?

    3. An FI holds a 15-year, $1,000,000 par value bond that is priced at 105 with a yield to maturity of 5.5 percent. The bond has a duration of 10.42 years, and the FI plans to sell it after two months. If interest rates increase to 6.5%, what is the change in price of the bond?

    4. Suppose the FI hedged its position by entering into a two-month forward contract to sell $1,000,000 par value of 15-year bonds at 105. If rates rise by 1 percent, how much will it make on the forward contract?

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    Solution Preview

    1 Village Bank has $240 million of assets with a duration of 14 years and liabilities worth $210 million with a duration of 4 years. In the interest of hedging interest rate risk, Village Bank is contemplating a macrohedge with interest rate futures contracts now selling for 102-21. If the spot and futures interest rates move together, how many futures contracts must Village Bank sell to fully hedge the balance sheet? Assume that the hedge uses T-bond futures having $100,000 face value with a duration of 9.0 years

    Assets=A= $240 million
    Liabilities=L= $210 million
    k= Liabilities/ Assets= 0.875 =210/240
    DA= 14 years
    DL= 4 years
    DF= 9 years

    Because DA ...

    Solution Summary

    Answers questions on Bond pricing, yield to maturity, duration, hedging using futures and forward contracts.

    $2.19

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