Page 165 of volume 4-middle of the page - it says that we sell 6800 of par value of the bond. How did they get 6800? I see no calculations for that- can anyone help me her ?
Got me.
This isn’t well-explained in the text, but I think I get it.
That section (4.4 on “Using Options”) is about adding convexity by adding options.
The strategy described basically does the following:
* Sell an amount of 30-year bonds that would maintain the effective duration of the portfolio if the proceeds were used to buy options on the bond.
6,800 par represents how much the 30-year bond needs to be sold for the effective duration to remain at 7.82. The curriculum does not show all the details of the calculation.
Well, options duration is not anywhere close to 30- year bonds so how did they come up with 6800 par amount?