Compute the prices deltas and gammas of the bonds

Assignment Help Finance Basics

Reference no: EM131365102

Consider two zero-coupon bonds with 2 years and 10 years to maturity. Let a = 0.2, b = 0.1, r = 0.05, σVasicek = 10%, and σCIR = 44.721%. The interest rate risk premium is zero in each case. We will consider a position consisting of one $100 par value 2-year bond, which we will hedge with a position in the 10-year bond.

a. Compute the prices, deltas, and gammas of the bonds using the CIR and Vasicek models. How do delta and gamma compare to duration and convexity?

b. Suppose the Vasicek model is true. You wish to hedge the 2-year bond using the 10-year bond. Consider a 1-day holding period and suppose the interest rate moves one standard deviation up or down. What is the return on the duration-hedged position? What is the return on the Vasicek delta-hedged position?

c. Repeat the previous part, only use the CIR model in place of the Vasicek model.

Reference no: EM131365102

Questions Cloud

What are the prices and durations of both bonds : Consider buying one 4-year bond and duration-hedging by selling an appropriate quantity of the 8-year bond. Any residual is financed with short-term (zero-duration) bonds. Suppose the yield curve can move up to 6.25% or down to 5.75% over the cour..

Power eyeglass lens will correct uncle myopia : A. What power eyeglass lens will correct your uncle's myopia? Assume the lenses will sit 2.0 cm from his eyes. B. What is your uncle's near point when wearing these glasses? Express your answer in cm using two significant figures.

Create a composer essay about composers life : Create a composer essay that consists of five hundred (500) words. This essay should be double-spaced and should cover these two areas - Composer's Life and Composer's Music.

Separate water cycle that is entirely outside the reactor : The water that passes through the reactor core of a water moderated fission reactor does not pass into the turbine. Instead, heat is transferred to a separate water cycle that is entirely outside the reactor. Why is this done?

Compute the prices deltas and gammas of the bonds : Compute the prices, deltas, and gammas of the bonds using the CIR and Vasicek models. How do delta and gamma compare to duration and convexity?

Composed of equal numbers of protons and electrons : A friend suggests that nuclei are composed of equal numbers of protons and electrons, and not neutrons. What evidence can you cite to show that your friend is mistaken?

What policies or procedures could you implement : HE310:An investigation by the Medicare Fraud Strike Force resulted in the discovery and ultimate sentencing of a registered nurse who defrauded her home health agency and the federal government. Read Box 8-5.If you were the administrator of this ..

Why you think people are tempted to act unethically : Think back to a time when you had a supervisor or coworker who you believe made an unethical decision or exhibited unethical behavior. List at least two reasons why you think people are tempted to act unethically.

User Account

All Pages