Question
A bond dealer buys $10 million face value of cash Treasury bonds for the dealer's inventory at 115-30. Since the dealer has no immediate prospects
A bond dealer buys $10 million face value of cash Treasury bonds for the dealer's inventory at 115-30. Since the dealer has no immediate prospects for selling the bonds, he hedges to protect them against a rise in interest rates by selling 100 T-bond futures contracts (contract size = $100,000) at 116-10. Two weeks later the dealer sells the cash bonds at 115-26 and lifts the hedge at 116-01. Ignoring transaction costs, what profit or loss did the dealer make on the T-bond transactions, including their hedge?
A) $156,250 profit
B) $156,250 loss
C) $15,625 profit
D) None of the above
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