How much will it cost sgi to implement the hedge portfolio, Financial Management

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How much will it cost sgi to implement the hedge portfolio

StoreGrand Insurance (SGI) has made two payment commitments to: Mrs. Anderson a lump sum of 5,000,000 in 5 years’ time, Janet Doe a sum of 400,000 in 3 years’ time. Respective cash contributions of Anderson and Doe are 3,482,793 and 321,984.

1. How may SGI immunize both liabilities against interest rate risk by purchasing STRIPS from Investment Banking Corporation?

2. How much will it cost SGI to implement the hedge portfolio eliminating all interest rate risk related to the two liabilities?

3. Estimate the risk-less profit from making the two commitments.

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