How would you go about constructing hedging portfolio

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Reference no: EM131962453

DURATION HEDGING WITH FUTURES

You are concerned about the liabilities of one of your subsidiaries in Pennsylvania. The subsidiary has an outstanding liability in terms of a bond with the face value of $24,000,000 and 3% annual coupon that matures in 3 years. The liability is fully guaranteed by you. You are assured that the subsidiary won't be able to honor the liability and, as a result, you look for a way to hedge your risk.

Assume that there are three zero coupon bonds available for hedging with respective maturities of 1, 2, and 3 years, and each of them has a face value of $1,000. How would you go about constructing a hedging portfolio for both duration and convexity in the term structure? More specifically, how many units of each bond do you need to trade in order to create the hedge?

Reference no: EM131962453

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