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Question
Assume a portfolio manager holds $2 million (par value) of 9 percent Treasury bonds due 1994-1999. The current market price is 77, for a yield of 12 percent. Fearing a rise in interest rates over the next three months, the manager seeks to protect this position by hedging in futures.(a) If T-bond futures are available at 67, what is the gain or loss from a simple hedge of 20 contracts if the price three months later is 60?
(b) What is the gain or loss on the cash position if the bonds are priced at 68 three months hence?
(c) What is the net effect of this hedge?
Answer
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