1. An investment company has purchased $100 million of 10 percent annual coupon, 6-year Eurobonds. The bonds have a duration of 4.79 years at the current market yields of 10 percent. The company wishes to hedge these bonds with Treasury-bond options that have a delta of 0.7. The duration of the underlying asset is 8.82, and the market value of the underlying asset is $98,000 per $100,000 face value. Finally, the volatility of the interest rates on the underlying bond of the options and the Eurobond is 0.84.

Given this information, what type of T-bond option, and how many options should be purchased, to hedge this investment?

792 put options.

792 call options.

942 put options.

942 call options.

554 put options.

2. A U.S. bank issues a 1-year, $1 million U.S. CD at 5 percent annual interest to finance a C $1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in 1 year upon maturity of the CD. Spot exchange rates are US $0.78493 per Canadian dollar.

If in one year there is no change in either interest rates or exchange rates, what is the end-of-year profit or loss of your bank's cash position? Assume that annual interest is paid on both the CD and the Canadian bonds on the date of liquidation in exactly one year.

Profit of US $20,000.

Loss of C $224,000

Profit of US $50,000.

Profit of C $63,000.

Profit of US $313,000.