It is early Tuesday morning of September 15, 2015 and Jonathan Haywood, a founder and a CEO of Haywood Investments, Ltd, is watching the city lights...

It is early Tuesday morning of September 15, 2015 and Jonathan Haywood,

a founder and a CEO of Haywood Investments, Ltd, is watching the city lights of

Vancouver from the window of his oce. He has just decided to bring a new challenge

into his life. He is determined to climb Mount Everest, the tallest pick on Earth, 8,848

meters above the sea level. He sets aside a mountaineering budget: $100,000 for guide

services, transportation, equipment and unexpected expenses. After a thorough search,

he decides to join a commercial expedition organized by Alpine Ascends International.

The summit is scheduled for May 10, 2016. The cost of the expedition is $65,000 and

it has to be paid in three installments.

Deposit: $20,000 due upon registration.

Deposit: $10,000 due December 15, 2015

Balance: $35,000 due March 15, 2016

The registration closes on October 15, 2015 and since Jonathan is a fnancial profes-

sional he will postpone his registration fee as long as possible. Also, he is planning

to buy mountaineering equipment for $20,000 and will do it on December 15, 2015 by

taking advantage of a MEC special sale for Alpine club members.

Jonathan can invest in a number of bonds, all of which have face value $1,000, described

as follows:

Bond Coupon rate (%) Maturity (months) Price

A 0 1 $993.38

B 0 3 $980.26

C 9 3 $1,002.47

D 0 6 $960.92

E 0 9 $941.95

F 0 12 $923.36

All coupon payments are monthly (expressed as monthly APR) and, therefor

therefore, you should use monthly compounding throughout.

(a) [10 marks] How many units of each bond does Jonathan need to buy or sell to

guarantee the cash ows for the Everest expedition? How much money does

Jonathan need to spend?

(b) [10 marks] Assume that Jonathan will keep the rest of the money for a celebration

party, which he is planning to organize after his return, around June 15, 2016.

How much money will he have for the party? Is it possible fully hedge this amount

against the interest rate risk?

(c) [20 marks - Challenge] Jonathan just recalled that he won't be able to shop for

equipment on December 15 because it is his wedding anniversary and his wife

is organizing a romantic retreat. He decides to postpone shopping for a month,

i.e. till January 15, 2016. Moreover, in this situation, he is concerned about a

possible parallel shift of the yield curve, which currently at. How many units of

each bond does Jonathan need to buy to immunize his mountaineering liabilities?

How much money will he have for a celebration party? [Hint: First exactly match

as many cash ows as you can and then immunize the remaining cash)