What will be the hedge ratio to hedge this position

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Reference no: EM132987012

Question: Suppose a portfolio manager owns $5,000,000 of a 10-year A-rated corporate bond with a duration of 7.8 and a yield of 4.6%. She plans to hedge its interest rate risk with the futures contracts on 3-month U.S. Treasuries that are priced at 98-06. The treasuries deliverable under these futures are yielding 0.8% and have a face value of $100,000. Assume that after analyzing the changes in yields she finds the following relationship between the yield on these corporate bonds and treasury yields:

(A-Rated Corporate Yield) = 3.25+ {0.5*(Treasury Yield)}.

What will be the hedge ratio to hedge this position?

Reference no: EM132987012

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