Gordon Gekko is a young, successful industrialist in New York City who enjoys the excitement of commodities speculation. Gordon has been dabbling in commodities since he was a teenager. He was introduced to this market by Patrick Bateman, who is a beef buyer for one of the leading food processors. Gordon recognizes the enormous risks involved in commodities speculating but feels that because hes young, he can aord to take a few chances. As a principal in a thriving industrialist rm, Gordon earns more than $150,000 a year. He follows a well-disciplined investment program and annually adds $15,000 to $20,000 to his portfolio. Recently, Gordon has started playing with nancial futuresinterest rate futures, to be exact. He admits he is no expert in interest rates, but he likes the price action these investments oer. This all started several months ago, when Gordon met Jordan Belfort, a broker who specializes in nancial futures, at a party. Gordon liked what Jordan had to say (mostly how you couldnt go wrong with interest rate futures) and soon set up a trading account with Jordans rm, Stratton Oakmont. The other day, Jordan called Gordon and suggested he get into ve-year Treasury note futures. He reasoned that with the Fed pushing up interest rates so aggressively, the short to intermediate sectors of the term structure would probably respond the mostwith the biggest jump in yields. Accordingly, Jordan recommended that Gordon short sell some ve-year T-note contracts. In particular, Jordan thinks that rates on these T-notes should go up by a full point (moving from about 5.5% to around 6.5%) and that Gordon should short four contracts. This would be a $5,400 investment because each contract requires an initial margin deposit of $1,350.

(a) Assume T-note futures ($100,000/contract; 32s of 1%) are now being quoted at 10316. i. Determine the current underlying value of this T-note futures contract. ii. What would this futures contract be quoted at if Jordan is right and the yield does go up by one percentage point, to 6.5%, on the date of expiration? (Hint: Itll be quoted at the same price as its underlying security, which in this case is assumed to be a ve-year, 6% semiannual-pay U.S. Treasury note.)

(b) How much prot will Gordon make if he shorts four contracts at 10316 and then covers when ve-year T-note contracts are quoted at 9800? Also, calculate the return on invested capital from this transaction. (c) What happens if rates go down? For example, how much will Gordon make if the yield on T-note futures goes down by just 3/4 of 1%, in which case these contracts would be trading at 1058?

(d) What risks do you see in the recommended short-sale transaction? What is your assessment of Gordons new interest in nancial futures? How do you think it compares to his established commodities investment program?

*USE FORMULA NOT EXCEL*