Question
It is March and Cavalier Financial Services Corporation is concerned about what an increase in interest rates will do to the value of its bond
It is March and Cavalier Financial Services Corporation is concerned about what an increase in interest rates will do to the value of its bond portfolio. The portfolio currently has a market value of $481.1 million, and Cavaliers management intends to liquidate $1 million in bonds in June to fund additional corporate loans. If interest rates increase to 6 percent, the bond will sell for $0.96 million. Cavaliers management sells 10 June Treasury bond contracts at 109-080 in March. Interest rates do increase, and in June Cavaliers management offsets its position by buying ten June Treasury bond contracts at 100-085. What is the dollar gain/loss to Cavalier from the combined cash and futures market operations described above?
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