Explanation:
This can be achieved by making the trade DVO1-neutral. Johnson has to buy the face amount of the TIPS such that:
F^R \times 0.092/100 = \`230` \text{ million} \times (0.056/100)$
\Rightarrow F^R = \`230` \text{ million} \times (0.056/0.092)$
= \`140` \text{ million}$
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| Bond | Yield% | DVO1 |
|---|---|---|
Tips $2\frac{5}{7}17`^{\text{th}}$ January 2020 | 1.096 | 0.092 |
$4\frac{6}{7}17`^{\text{th}}$ February 2020 | 3.461 | 0.056 |
Compute the TIPS face amount that should be purchased for the trade to be hedged against the interest rate levels.
A
`$200` million
B
`$275` million
C
`$160` million
D
`$140` million
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