RISK MANAGEMENT
I need the answers + formulas + explanations
You want to protect $100 million in bond investments against rising rates and plan to use 10-year treasury futures.
Do you go long or short futures?
Current rates are 3%.
If rates go up to 4%, what is your gain or loss on the contract?
You plan to buy a 10-year corporate bond in one month. Current yields for corporate bonds are 4% when treasury rates are 3%. You want to protect against rates falling.
Do you go long or short treasury futures?
Treasury rates fall 50 bps.
How much do you gain or lose on the futures contract?
What happens if corporate bond spreads fall 50 bps over the same time period?
Treasury yield protected to 3%, but spread is 50 so net is?