A wealthy investor holds $500,000worth of U.S. Treasury bonds. These bonds are currently being quoted at104% of par. The investor isconcerned, however, that rates are headed up over the next sixmonths, and he would like to do something to protect this bond portfolio. His broker advises him to set up a hedge usingT-bond futures contracts. Assume these contracts are now trading at110-28.

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

b.It's now six monthslater, and rates have indeed gone up. Theinvestor's Treasury bonds are now being quoted at92% ofpar, and theT-bond futures contracts used in the hedge are now trading at98-20. 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 successfulhedge? Explain.

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