problem 1: Assume that the pension you are managing is holding Rs.15 million of six-year bonds, and if their interest rate increases by 1%, the bonds will fall in price by 7 points. Assume that as well that when its interest rate rises by 1%, the five-year Treasury bond contract drops by 6 points and when The T-bond futures contract interest rate increases by 1%, on average the interest rate on the six-year Treasury bonds increases by 1.2%.
What must you do in the futures market to hedge the interest rate risk on Rs.15 million of six year bonds?
problem 2: Your Company owns the given bonds:
If general interest rates increase from 8% to 8.5%, what is the estimated change in the value of the portfolio?
a) Distinguish between option contracts and futures contracts.
b) Why are option contracts usually more desirable for hedging than futures contracts when a financial institution is conducting a macro hedge?
problem 4: Laser Ace is selling at $22.00 per share. The most recent annual dividend paid was $0.80. By using the Gordon Growth model, if the market needs a return of 11%, determine the expected dividend growth rate for Laser Ace?