Assume a portfolio manager holds $1 million of 5.2 percent Treasury bonds due 2010—2015. The current market price is 76—2, for a yield of 6.95 percent. The manager fears a rise in interest rates in the next three months and wishes to protect this position against such a rise by hedging in futures.

a. Ignoring weighted hedges, what should the manager do?

b. Assume T-bond futures contracts are available at 68, and the price 3 months later is 59—12. If the manager constructs the correct hedge, what is the gain or loss on this position?

c. The price of the Treasury bonds 3 months later is 67—8. What is the gain or loss on this cash position?

d. What is the net effect of this hedge?