Explanation:
Since the trader "owns" (is long) the bond with a 4-year KR01 of 0.9290, the total key rate exposure is 0.9290. To hedge this exposure, he must take an offsetting short position (i.e., sell) in the hedging bond to achieve an equal and opposite KR01 of -0.9290.
Let be the face value to short. The KR01 of the hedging bond is given as 0.02025 per 100 face value. The relationship is:
Solving for : .
Therefore, the correct hedge is to sell a 4-year bond with a face value of USD 4,587.65.
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Q.53 Ian Klein, a bond trader owns a bond which has a 4-year key rate '01 of 0.9290. If Klein wishes to hedge this key rate exposure by trading a 4-year bond that itself has a 4-year KR01 of 0.02025 per 100 face value, what is the hedge trade?
A
Buy a 4-year bond with USD 4,587.65 face value.
B
Buy a 4-year bond with USD 4,938.27 face value.
C
Sell a 4-year bond with USD 4,587.65 face value.
D
Sell a 4-year bond with USD 4,938.27 face value.