1. Assume a portfolio manager holds $1 million of 5.2 percent Treasury bonds due 20102015. The current market price is 762, for a yield of 6.95 percent. The manager fears a rise in interest rates in the next three months and wishes to protect this position against such a rise by hedging in futures.

   1. Ignoring weighted hedges, what should the manager do?

   2. AssumeT-bondfuturescontractsareavailableat68,andtheprice3monthslateris5912.

      If the manager constructs the correct hedge, what is the gain or loss on this position?

   3. The price of the Treasury bonds 3 months later is 678. What is the gain or loss on this cash position?

   4. What is the net effect of this hedge?