Answer for quetstion 4 on page 137 reading 38. To synthetically sell $40M in bonds and convert into cash, shouldn’t the formular starts with (0.25-6.75)/5.25…? Otherwise I think it contradicts with the example on page 115. Thanks
In example on page 115 when they talk about cash they mean cash instruments (i.e. 6 month T-bills, which have average duration of .25) In question 4, you are synthetically converting bonds to equity, and for that you have to convert bonds to cash (i.e. synthetic ) and then use this to buy equity. To do that you have adjust duration of $40M in bonds to 0. Hope this helps