Question
1). A). In February, Dan Allen forecasts that interest rates will decrease over the next month. If his expectation is correct, the market value of
1). A). In February, Dan Allen forecasts that interest rates will decrease over the next month. If his expectation is correct, the market value of Treasury bonds should increase. Allen calls a broker and purchases a futures contract on Treasury bonds. Assume that the price of the contract was 94-00, which represents 94 percent of the par value, and that the price of Treasury bonds on the March settlement date is 96-00, which represents 96 percent of the par value. Allen can accept delivery of these Treasury bonds and sell them for more than he paid for them. Because the futures on Treasury bonds represent 100 000 of par value.
Calculate the nominal profit from this speculative strategy
b). Assume that the price of Treasury bonds as of the March settlement date is 93-00.
Calculate the nominal profit from this speculative strategy
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