A wealthy investor holds

$700,000

worth of U.S. Treasury bonds. These bonds are currently being quoted at

105105 %

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

110 -12.

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

93.5 %

of par, and the T-bond futures contracts used in the hedge are now trading at

96 -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

7

T-bond futures contracts to hedge.This is the correct answer.

B.

The investor needs to short

70

T-bond futures contracts to hedge.

C.

The investor needs to take a long position in

7

T-bond futures contracts to hedge.Your answer is not correct.

D.

The investor needs to take a long position in

70

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

$80500.00.

(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.)