In your portfolio you have $1 million of 20 year, 8 5/8 percent bonds which are
ID: 2675103 • Letter: I
Question
In your portfolio you have $1 million of 20 year, 8 5/8 percent bonds which are selling at 83.15 (or 83 15/32) against this position. Because you feel interest rates will rise you sell 10 bond futures at 81.15 (or 81 15/32) against this position. Two months later you decide to close your position. The bonds have fallen to 78 and the futures contracts are at 75.16 (75 16/32). Disregarding margin and transaction costs, what is your gain or loss? (calculate change in value of bonds and change in value of futures .)
a. $5,000 loss.
b. $500 loss.
c. Breakeven.
d. $500 gain.
e. $5,000 gain.
Explanation / Answer
The answer is: E. $5,000 gain. :)