One of the unique features of futures contracts is that they have only one source of return–the capital gains that can accrue when price movements have an upward bias. Remember that there are no current cash flows associated with this financial asset. These instruments are known for their volatility due to swings in prices and the leverage upon purchase. With futures trading done in margin, small amounts of capital are needed to control relatively large investment positions.

Assume that Sakura is interested in investing in bond futures, specifically in JGB 10-year Treasury bond futures. Refer to the contract terms of JGB futures: “100 million yen standardized 6%, 10-year JGB.” Suppose she has purchased five March bond contracts at the settlement price of 101.5. The required amount of investor capital to be deposited with a broker at the time of the initial transaction is 5% of the contract’s value. Create a spreadsheet to model and answer the following questions concerning the investment in futures contracts.

a. What is the total amount of Sakura’s initial margin for the five contracts?

b. What is the total number of bonds she controls?

c. Assume that the March bonds settled at 104, and Sakura decides to sell and take her profit. What is the selling price of the bond futures contracts?

d. Calculate the return on invested capital earned on this transaction. (Remember that the return is based on the amount of funds actually invested in the contract rather than on the value of the contract itself.)

e. If the March bonds actually settled at 100.2, what would be Sakura’s profit (or loss) if she decides to sell them?