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Question
Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.
On the advice of its chief financial officer, Allright wants to hedge the balance sheet with T-bond option contracts. The underlying bonds currently have a duration of 8.82 years and a market value of $97,000 per $100,000 face value. Further, the delta of the options is 0.5. What type of contract, and how many contracts should Allright use to hedge this balance sheet?
A. puts; 447 contracts.
B. calls; 625 contracts.
C. puts; 625 contracts.
D. calls; 447 contracts.
E. puts; 206 contracts.
Answer
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