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    Home Assignment II

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    Dasha Nikiforova
    This document provides three assignments related to fixed income and derivatives. The first assignment involves calculating metrics like modified duration and DV01 for bonds, determining a hedging ratio using futures contracts. The second assignment involves using a Ho-Lee model to price an option on a zero-coupon bond. The third assignment involves using an interest rate tree to value callable bonds and calculate option-adjusted spreads.

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    Home Assignment II

    Uploaded by

    Dasha Nikiforova
    125 views2 pages
    This document provides three assignments related to fixed income and derivatives. The first assignment involves calculating metrics like modified duration and DV01 for bonds, determining a hedging ratio using futures contracts. The second assignment involves using a Ho-Lee model to price an option on a zero-coupon bond. The third assignment involves using an interest rate tree to value callable bonds and calculate option-adjusted spreads.

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    This document provides three assignments related to fixed income and derivatives. The first assignment involves calculating metrics like modified duration and DV01 for bonds, determining a hedging ratio using futures contracts. The second assignment involves using a Ho-Lee model to price an option on a zero-coupon bond. The third assignment involves using an interest rate tree to value callable bonds and calculate option-adjusted spreads.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    125 views2 pages

    Home Assignment II

    Uploaded by

    Dasha Nikiforova
    This document provides three assignments related to fixed income and derivatives. The first assignment involves calculating metrics like modified duration and DV01 for bonds, determining a hedging ratio using futures contracts. The second assignment involves using a Ho-Lee model to price an option on a zero-coupon bond. The third assignment involves using an interest rate tree to value callable bonds and calculate option-adjusted spreads.

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    © All Rights Reserved
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    Home Assignment II

    Fixed Income and Derivatives


    ICEF, Fall 2015
    Due in class on December 8, 2015
    1.

    Suppose you see the following information on your Bloomberg screen:

    Price of 5-year T-Note futures = 108-31/32nds. Delivery Month: September 2002


    Price date = July 6, 2002
    Coupon

    Maturity

    Bond cash price


    (32nds)

    Conversion factor

    6.875

    03/31/2007

    104-31.75

    0.95821

    6.875

    04/30/2007

    104-30

    0.9574

    6.750

    05/31/2007

    104-12.50

    0.9520

    6.375

    06/30/2007

    102-28.75

    0.9367

    5.500

    07/31/2007

    99-08.75

    0.9013

    Suppose you want to hedge $10 mln. par amount of the 5 of 07/31/2007.
    a) Calculate modified duration and DV01 of all bonds.
    b) Calculate the gross basis of all bonds. Find the CTD bond and explain your choice.
    c) Using the hedging ratio formula that utilizes DV01 determine how many September 5year futures contracts you will need to hedge the $10 mln. position in the 5

    2. Ho-Lee model. The observed term structure of the zero-coupon bonds at time 0 is as follows:

    P(0,T)

    0.96

    0.92

    0.87

    0.82

    0.77

    0.73

    Using the notation of the lecture slides we have u(2)=1.01 and d(2)=0.96 and the tree is
    recombining. Throughout the binomial tree the risk-neutral probability q is constant.
    A put option expires at time 2 and is issued on a zero-coupon bond that matures at time 3. The
    option exercise price is 0.96.
    a) Determine the risk-neutral probability at any point in the tree
    b) Determine the values of u(T) and d(T) for T=,3,4,5,6

    Conversion factors are less than 1 because in this example they are calculated based on 8% coupon rather than
    standard 6% convention common in the US.

    c) Find the values of nodes of the binomial tree and put them in a table like we did in the class
    d) For each of the outcomes at time 2 find the payoffs on the put option. Using the risk-neutral
    probabilities and values of the obtained values for future zero-coupon bonds in the discount
    factor find the time 0 price of the put option.
    e) Find the time 0 price of the put option by constructing a replicating strategy, which uses the
    zero-coupon bond maturing at time 3. (Hint: Reading Jarrow Chapters 6-9 could be helpful).
    Compare the result to the price obtained in d) and comment.

    3. Consider the following short-term interest rate tree (four 1-year periods):

    0.338464
    0.262012
    0.196941
    0.14318
    0.1

    0.245776
    0.186493

    0.137401
    0.097916

    0.17847
    0.13274

    0.095862

    0.129596
    0.09448
    0.094106

    a) Calculate the value at each node of the tree of a 5-year zero-coupon bond with face
    value 100. What is the YTM on that bond?
    b)

    Calculate the price of an identical bond that would be callable at $75. Calculate the
    YTM on that bond and the spread over the straight bond. What is the value of the
    embedded call option according to the model?

    c) Assume that the market price of the callable bond is $44. What is the OAS of the bond, that is,
    what is the constant spread that must be added to all rates in the tree to make the model price
    equal to the market price?
    d) Redo question 2 for a call price equal to 80.
    e) Assuming that the market price is 50, calculate the OAS for that bond.

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