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a)
To compute: The number of put option bonds are required to hedge portfolio of bond.
a)
![Check Mark](/static/check-mark.png)
Explanation of Solution
The computation of number of put option bond is as follows:
b)
To compute: The anticipated gain or loss in the hedge on the put option.
b)
![Check Mark](/static/check-mark.png)
Explanation of Solution
The computation of gain or loss is as follows:
A $100,000 20year, 8% bond vending at $96,157 indicates 8.4% yield.
Hence, the gain from the put option hedge is $4,614,028.
c)
To discuss: The anticipated change in the market value of portfolio of bond.
c)
![Check Mark](/static/check-mark.png)
Explanation of Solution
The computation of change in market value of portfolio of bond is as follows:
Hence, the change in bond is $4,629,630.
d)
To discuss: Whether the payoff of hedge set off cost of placing the hedge.
d)
![Check Mark](/static/check-mark.png)
Explanation of Solution
The computation of payoff of hedge is as follows:
Hence the payoff of hedge is 0.58%.
e)
To discuss: Whether the gain on the portfolio bonds set off cost of placing the hedge.
e)
![Check Mark](/static/check-mark.png)
Explanation of Solution
The computation of gain from the bond portfolio is as follows:
Hence the gain from bond is -0.58%.
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Chapter 23 Solutions
Financial Markets and Institutions
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
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