What transaction should be initiated

Reference no: EM132467015

Problem: An investor owns 50 Million Euro of a bond issued by Vodafone: Vodafone 2,5% 2027 (Price =105% and Modified duration= 6,5) and decides to hedge the credit risk with the Main Index 5 years (maturity March 2025).

Data:

a. Main index trades 0,53%-0,55% (coupon 100bps)

b. Main Index DV01=0,055% and PV01=5,3

1. What transaction should be initiated?

2. Calculate the initial fee? Precise if paid or received by the investor?

3. What are the risks associated with this hedge?

4. If the historical beta between the Vodafone Credit spread and the Main index is 2, how would you adjust the hedging (new hedging ratio)?

Reference no: EM132467015

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