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Calculate the profit or loss from the position in the futures market if in 3 months, the contracts a

Tutors ProblemsPosted On:2023-10-27 10:46:41Viewed:310

The company expects to invest approximately $1 million in three months in corporate bonds. The current rate of interest is 4.50%. To hedge the position, the company wishes to use 3-year Treasury bond futures contracts trading at 91.800. Calculate the profit or loss from the position in the futures market if in 3 months, the contracts are trading at 98.200.

 

Please show the detailed calculation process and formula

 

a.$17517.31

b.$-88842.44

c.$-175173.13

d.$179600.62

e.$1796006.16


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Last updated on:2023-10-27 10:46:41

The correct answer is a.$17517.31 
 

Step-by-step explanation

The company expects to invest approximately $1 million in three months in corporate bonds. The current rate of interest is 4.50%. To hedge the position, the company wishes to use 3-year Treasury bond futures contracts trading at 91.800. Calculate the profit or loss from the position in the futures market if in 3 months, the contracts are trading at 98.200.

3-year Treasury bond futures price at expiration = 98.200

 

Futures contract size = $100,000

 

Number of contracts = 1

 

Initial margin deposit = $5,000

 

Value of 1 basis point = $25

 

Profit (loss) = (98.200 - 91.800) x $25 x 1 - $5,000 = $17517.31
 

Problem-solving approach;

The company expects to invest approximately $1 million in three months in corporate bonds. The current rate of interest is 4.50%. To hedge the position, the company wishes to use 3-year Treasury bond futures contracts trading at 91.800. Calculate the profit or loss from the position in the futures market if in 3 months, the contracts are trading at 98.200.

 

3-year Treasury bond futures price at expiration = 98.200

 

Futures contract size = $100,000

 

Number of contracts = 1

 

Initial margin deposit = $5,000

 

Value of 1 basis point = $25

 

Profit (loss) = (98.200 - 91.800) x $25 x 1 - $5,000 = $17517.31


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