23-100 Given this information,what type of T-bond option,and how many options should be purchased,to hedge this investment?

Question

Quizplus · Accepted Answer

To calculate the number of put options needed to hedge this investment, we need to divide the face value of the T-bond by the strike price of the put option and then multiply by the delta of the option contract.

For this particular scenario, the calculation would be:

$7,410,000 face value / $7,850 strike price = 942.04 contracts

We would round up to the nearest whole number, which gives us 942 put options. Since put options increase in value when bond prices decrease, this would effectively hedge our long position in T-bonds.

23-100 Given This Information,what Type of T-Bond Option,and How Many