Dudley Savings Bank wishes to take a position in Treasury bond futures contracts

Question

Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 112 ? 100. Dudley Savings thinks interest rates will go down over the period of investment. The face value of the bond underlying the futures contract is $100,000.

Should the bank go long or short on the futures contracts?

Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts increases to 112 ? 270. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts decreases to 111 ? 300. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 112 ? 100. Dudley Savings thinks interest rates will go down over the period of investment. The face value of the bond underlying the futures contract is $100,000.

Explanation / Answer

a) Long position

b) Becasue if interest rate goes down then price of existing bond will go up and therefore there will be profit when earlier buy of lower price will be squared off with higher price sales.

Profit = 100000 * {(112+27/32) - (112 + 10/32)} = 53125

c) Profit = 100000 * {(111+30/32) - (112 + 10/32)} = -37500 (Loss)

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.