A wealthy investor holds $300,000 worth of U.S Treasuary bonds. These bonds as currently being quoted at 104.5% of par. The investor is concerned, however, that rates are headed up over the next six months, and he would like to do something to protect this bond portfolio. Her broker advises her to set up a hedge using T-bond futures contracts. Assume these contracts are now trading at 110-00.

a. Briefly describe how the investor would set up this hedge. Would be she go long or short ? How many contracts would she need?

b. It's now six months later, and rates have indeed gone up. The investor's Treasury bonds are now being quoted 95% of par, and the T-bond futures contracts used in the hedge are now trading at 96-12. Show what has happened to the value of the bond portfolio and the profit (or loss) made on the futures hedge.

c. Was this a successful hedge? Explain.

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a. How would the investor set up the hedge?

A. The investor needs to short 30 T-bond futures contracts to hedge.

B. The investor needs to take a long position in 3 T-bond futures contracts to hedge.

C. The investor needs to short 3 T-bond futures contracts to hedge

D. The investor needs to take a long position in 30 T-bond futures contracts to hedge.