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Assume a portfolio manager buys $2 million worth of 7 per cent bonds due in one year at par value of $1000. Thereafter, the price of the bond drops to $990. Fearing a rise in interest rates over the next three months causing further falls in bond prices, the manager seeks to protect this position by hedging in the futures market. If 6% coupon three year Commonwealth bond Futures contracts are currently trading at a price of 95.505, how many contracts does the portfolio manager need to buy/sell to hedge the portfolio? Explain the reasons why you think this may be an incomplete hedge.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M9682141

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