Question 9 . Price Sensitivity Hedge ( 9 marks ) Mr. Tories manages a bond portfolio valued at $27 492 045 . The bonds in this portfolio have a face…

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Question 9 . Price Sensitivity Hedge ( 9 marks )Mr. Tories manages a bond portfolio valued at $27 492 045 . The bonds in this portfoliohave a face value of $25 million . The portfolio has a yield of 8 . 35 percent and a duration of7 . 67 . Mr. Torior is worried that interest rates will rise within the next year . He would like tolower the duration of your bond portfolio to 5 years . He finds a one- year bond futurescontract and thinks that it would be an appropriate hedge for your portfolio . This futurescontract is priced at 109 17/ 32 , has an implied yield of 8 percent , and has an impliedduration of 7 9 years . The futures contract size is $ 100 ,900Should Mr. Torigg buy or sell futures ? ( 1 mark )How many contracts should Mr . Tories use ? ( 4 marks )Suppose that the portfolio’s value falls to $26 557 089 , and the futures price turnsout to be 103 8 / 32 in one year’s time . What is the net profit from the hedgedposition ? ( 3 marks )

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