It is March and Cavalier Financial Services Corporation is concerned about what an increase in interest rates will do to the value of its bond portfolio The portfolio currently has a market value of $101 1 million, and Cavaliers management intends to liquidate $1 1 million in bonds in June to fund ...

a Loss on cash transaction 100000 Gain on futures transa ...

It is March and Cavalier Financial Services Corporation is concerned about what an increase in interest rates

Question:

It is March and Cavalier Financial Services is concerned about what an increase in interest rates will do to the value of its bond The currently has a market value of $101.1 million, and Cavalier’s management intends to liquidate $1.1 million in bonds in June to fund additional corporate loans. If interest rates increase to 6 percent, the bond will sell for $1 million with a loss of $100,000. Cavalier’s management sells 10 June Treasury bond contracts at 109-050 in March. Interest rates do increase, and in June Cavalier’s management offsets its position by buying ten June Treasury bond contracts at 100-030.
a. What is the dollar gain/loss to Cavalier from the combined cash and futures market operations described above?
b. What is the basis at the initiation of the hedge?
c. What is the basis at the termination of the hedge?
d. Illustrate how the dollar return is related to the change in the basis from initiation to termination.

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...