Explanation:
First, compute the DV01 of the zero-coupon bond position:
To determine the face amount of the bond required to hedge this option exposure, we use the following approach:
\text{face value} = 100\text{M} \times \frac{0.70}{0.75} = \`$93.33`\text{M}In order to hedge this `100` million option position, the investor must purchase \`93.33` million in face value of the bond.
(Book 4, Module 58.1, LO 58.c)
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Question 98
An investor takes a long position in an option worth `100` million. The option has a DV01 of 0.70. The investor wishes to hedge this option position with a 10-year zero-coupon bond, which increases in price from \`74.50 to \$75.25` when yields drop by one basis point. What is the face amount of the bond required to hedge this option position?
A
`$70.00` million.
B
`$75.25` million.
C
`$93.33` million.
D
`$107.14` million.
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