Business, 19.06.2020 19:57 daniel1480

You are a bond portfolio manager at XYZ and the investment committee has asked you to buy a bond with price B1 and sell short a certain quantity N of a second bond with price B2: Bond with price B1 is a 1-year zero coupon bond with a yield-to-maturity of 1% Bond with price B2 is a 2-year zero coupon bond with a yield-to-maturity of 2% The resulting portfolio value is Π = B1- NB2 Questions: 1. How would you choose N to optimally hedge the interest rate exposure of the portfolio Π and thus minimize its sensitivity to interest rate change? Find a numerical value for N

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