Weston Ltd is a company of underwriter that today has had to take up a 10-year debenture issues by XYZ Ltd. XYZ debenture offers a coupon rate of 7.5% p.a. paid semi-annually and is currently priced at a yield of 5.5% p.a. compounded semi-annually. Face value is $10 million.Weston Ltd intends to hedge its position by utilizing the SFE 10-year Treasury bond futures contract. Assume a coupon rate of 6% p.a. compounded semi-annually for the Treasury bond, and the current quoted price for the future contract is $90.50. The contract size (i.e., the face value) for a unit of the 10-year Treasury bond future contract is $100,000. What Strategy and how many SEF futures contracts are required by Weston Ltd to hedge its position in the XYZ debenture? (Duration for XYZ debenture = 5.4732; Duration for futures contract = 6.3244).Short 105 SEF futures contractsLong 105 SEF futures contractsShort-sell 105 SEF futures contractsNone of the above.

To hedge its position, Weston Ltd would want to offset the interest rate risk of the XYZ debenture by taking an opposite position in the futures market. Since the debenture and the futures contract have different durations, Weston Ltd would need to adjust the number of futures contracts to match the duration of the debenture.

The formula to calculate the number of futures contracts needed for the hedge is:

Number of Contracts = (Duration of Debenture / Duration of Futures Contract) * (Value of Debenture / Value of Futures Contract)

Substituting the given values:

Number of Contracts = (5.4732 / 6.3244) * ($10,000,000 /$100,000)

Number of Contracts = 0.8653 * 100

Number of Contracts = 86.53

Since futures contracts are standardized and cannot be bought or sold in fractions, Weston Ltd would need to round this number to the nearest whole number.

Therefore, Weston Ltd would need to short 87 SFE futures contracts to hedge its position in the XYZ debenture.

However, none of the given options match this answer. So, the correct answer is:

D. None of the above.

Weston Ltd can hedge its position in the XYZ debenture by using a short hedge strategy with the SFE 10-year Treasury bond futures contract. This is because the company is exposed to the risk of falling bond prices (which occur when interest rates rise), and a short hedge would allow the company to profit from falling futures prices.

The number of futures contracts required to hedge the position can be calculated using the formula:

Number of contracts = (Duration of the bond position / Duration of the futures contract) * (Value of the bond position / Value of the futures contract)

Given that the duration of the XYZ debenture is 5.4732, the duration of the futures contract is 6.3244, the value of the XYZ debenture is $10 million, and the value of the futures contract is$100,000, we can substitute these values into the formula:

Number of contracts = (5.4732 / 6.3244) * ($10,000,000 /$100,000) = 86.5 contracts

Since futures contracts are standardized and cannot be traded in fractions, Weston Ltd would need to trade in 87 contracts. However, this option is not given. So, the answer is D. None of the above.

Weston Ltd can hedge its position in the XYZ debenture by using a duration-based hedging strategy. This involves taking a position in the futures contract that has an opposite duration to the position in the debenture.

The number of futures contracts needed to hedge the position can be calculated using the formula:

Number of contracts = (Duration of debenture / Duration of futures contract) * (Value of debenture / Value of futures contract)

Substituting the given values into the formula, we get:

Number of contracts = (5.4732 / 6.3244) * ($10,000,000 /$100,000) = 86.5 contracts

Since futures contracts are standardized and cannot be traded in fractions, Weston Ltd would need to trade in 87 contracts. However, this option is not given in the choices.

The strategy would be to short the futures contracts. This is because Weston Ltd is long on the debenture (it owns the debenture) and wants to hedge against the risk of interest rates rising, which would decrease the value of the debenture. By shorting the futures contracts, Weston Ltd can profit if the price of the futures contracts decreases, offsetting the loss on the debenture.

Therefore, the answer is none of the above. Weston Ltd should short 87 SEF futures contracts to hedge its position in the XYZ debenture.