Hi, I am trying to value a long - short portfolio The term structure is flat at a rate of 6% (semi-annual). You are curently managing the portfolio of bonds listed below ( all coupons paid semianually) Long 500 worth of 6.5% coupon bonds t=4 Long 1000 worth of 7 % coupon bonds t=3 Short $ 1000 worth of 8.5% coupon bonds t=4 If interest rates rise by .5% what is the estimated effect of that change on the value of your portfolio (in percent) ? I can use the duration to estimate the new value of each of the portfolio positions (done) however, I am not sure which is the total value of the prtfolio. My concrete question is, if I have a long-short portfolio, long 1000 in a bond, and short 1000 in other bond, what is the value of my portfolio ? 1000 ? 2000? Have been looking around and can’t find an answer. Thanks
If by long $1000 you mean that the bond you own is worth $1000, the value of your portfolio is 0. Maybe it is easiest to think of these questions using dollar duration. Try it that way and see if you get it. The short exposure should hedge the long exposure.
Thanks, got the answer after I posted. The value will actually be $ 500, (The easiset way to get it is to assess the value of the portfolio if it was liquidated) Thanks