Explanation:
The hedge ratio is (0.1061 / 0.1544) = 0.6872. Since the investor has a short position in his bond portfolio, the investor needs to buy $0.6872 of par value of the hedging instrument for every $1 of par value for the 20-year bond.
(Book 4, Module 58.1, LO 58.c)
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Use the following information to answer the next two questions.
An investor has a short position in a 20-year, 5% coupon, U.S. Treasury bond (T-bond) with a yield to maturity (YTM) of 6% and a par value of $100. Assume discounting occurs on a semiannual basis.
Question 90 of 100
Using a 30-year, 5% coupon, U.S. T-bond yielding 5% with a DV01 of 0.1544 to hedge the interest rate risk in the 20-year bond, which of the following actions should the investor take?
A
Buy $68.20 of the hedging instrument.
B
Buy $68.72 of the hedging instrument.
C
Buy $87.50 of the hedging instrument.
D
Buy $88.08 of the hedging instrument.
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