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A given mortgage security is trading at par. The expected average price change from a projected change in a given market yield is 1 for the mortgage security and 0.4 and 2.0 for hedging instrument one and two respectively. The expected average price change from a projected twist in the yield curve is 0.4 for the mortgage security and 0.3 and 0.5 for hedging instrument one and two respectively. What positions in hedging instruments one and two should a manager take to hedge the price of the mortgage security from the projected market changes? For every dollar of face value of the mortgage security: A. buy $2.5 of hedging instrument one and $0.5 of hedging instrument two. B. sell $0.75 of hedging instrument one and $0.35 of hedging instrument two. C. sell $2.5 of hedging instrument one and $0.5 of hedging instrument two. |