4. Suppose that an investment banking firm decides to underwrite by firm commitment

a corporate bond issue with a par value of $10 million. The underwriter pays the issuing

firm $99 per $100 of par value. The underwriter decides to hedge this position by going

short Treasury bond futures. Each bond futures contract has a par value of $100,000

and the current price of the Treasury bond futures contract is $101 per hundred dollars

of par. One week later the investment banking firm is able to sell the entire corporate

bond issue to institutional investors but is forced to sell these bonds at an average price

of $98 per hundred dollars of par. The price of the Treasury bond futures contract drops

to $99.50 hundred dollars of par during this week. Compute the net loss on the position

taken by the investment banking firm. Was this hedge advantageous?