A wealthy investor holds

$400 comma 000

worth of U.S. Treasury bonds. These bonds are 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. His broker advises him to set up a hedge using T-bond futures contracts. Assume these contracts are now trading at

111-00.

a. How would the investor set up the hedge? (Select the best answer below.)

A.

The investor needs to short

4

T-bond futures contracts to hedge.

B.

The investor needs to take a long position in

4

T-bond futures contracts to hedge.

C.

The investor needs to short

40

T-bond futures contracts to hedge.

D.

The investor needs to take a long position in

40

T-bond futures contracts to hedge.

b. The profit (or loss) on the bond portfolio at the expiration date of the futures contracts is

$nothing

.

(Round to the nearest cent. Enter a positive number for a profit and a negative number for a loss.)The profit (or loss) on the futures at the expiration date of the futures contracts is

$nothing

.

(Round to the nearest cent. Enter a positive number for a profit and a negative number for a loss.)The net profit (or loss) of the combined hedge portfolio is

$nothing

.

(Round to the nearest cent. Enter a positive number for a profit and a negative number for a loss.)

c. Was this a successful hedge?(Select the best answer below.)

A.

Yes, the profit on the short sale completely covered the loss on the bond portfolio.

B.

No, the profit on the short sale only partially covered the loss on the bond portfolio.

C.

Yes, the profit on the bond portfolio completely covered the loss on the short sale.

D.

No, the profit on the bond portfolio only partially covered the loss on the short sale.