Question
1) A low risk tolerance investor is holding $600,000 worth of Australian's Commonwealth Government Securities (CGS). The investor is concerned over the rumours that interest
1) A low risk tolerance investor is holding $600,000 worth of Australian's Commonwealth Government Securities (CGS). The investor is concerned over the rumours that interest rates are headed up in the next six months, and he would like to do something to protect his portfolio. His financial advisor advises him to set up a hedge using T-bond future contracts. Assuming that these contracts are trading at 111'06, answer the following questions.
a) It is now six months later, and rates have indeed gone up. The investor's CGS are now quoted at 93 and T-bond futures used in the hedge are now trading at 98'00. Show what has happened to the value of the bond portfolio and profit/loss made on the futures hedge assuming that the discount rate is 5% per annum.
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