You currently hold a 7-year fixed rate bond 5% annually.

You currently hold a 7-year fixed rate bond 5% annually. You would like to hedge against changes in the level and the slope of the yield curve and you plan to use a 1-year zero coupon bond and a 7-year zero coupon bond. Use the following table to compute the adequate positions in the hedging instruments.

Maturity                      β1                             β2                             Z(t, 1)

1.00                        1.1150                -0.2540                      0.9800

2.00                       0.9940                 -0.3010                      0.9600

3.00                       0.9640                 -0.1470                      0.9300

4.00                       0.9330                  0.0080                       0.8900

5.00                      0.9300                   0.1620                       0.8500

6.00                      0.9260                  0.3160                        0.8100

7.00                      0.9270                  0.4230                        0.7700

8.00                      0.9270                  0.5300                        0.7300

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