An Investment Company Has Purchased $100 Million of 10 Percent

Multiple Choice

An investment company has purchased $100 million of 10 percent annual coupon, 6-year Eurobonds. The bonds have a duration of 4.79 years at the current market yields of 10 percent. The company wishes to hedge these bonds with Treasury-bond options that have a delta of 0.7. The duration of the underlying asset is 8.82, and the market value of the underlying asset is $98,000 per $100,000 face value. Finally, the volatility of the interest rates on the underlying bond of the options and the Eurobond is 0.84.
-What is the net gain or loss to the investment company resulting from the change in rates given that the hedge was placed?

A) Lose $2,131.
B) Gain $2,131.
C) Lose $695,191.
D) Gain $695,191.
E) Gain $2,382,858.