A wealthy investor holds $400,000 worth of U.S. Treasury bonds. These bonds are currently being quoted at 106?% 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 112?-00.

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

b. ?It's now six months? later, and rates have indeed gone up. The? investor's Treasury bonds are now being quoted at 92?% of? par, and the? T-bond futures contracts used in the hedge are now trading at 97?-20. 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.

A.

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

A. The investor needs to short 40 ?T-bond futures contracts to hedge.

B. The investor needs to short 4 ?T-bond futures contracts to hedge.

C. The investor needs to take a long position in 4 ?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 ?$_______.?(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 ?$_______.?(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 ?$______.?(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. ?No, the profit on the short sale only partially covered the loss on the bond portfolio.

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

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