Part I $-$ Set C

Trading in the $10-$year Treasury bond futures contract

On Wednesday $3$ April $2024,$ you will be required to enter into five June $202410-$year bond futures contracts. You may enter into these contracts as a buyer or as a seller.

Whether you enter into these contracts as a buyer or a seller will depend on your expectations as to the likely direction of long$-$term interest rates. You should state a logical basis for entering into these contracts as a buyer or seller. For example, you might speculate that long$-$ term interest rates are likely to rise or fall. Note that the basis of your speculation is of lesser importance here than is demonstrating that you understand fully the nature of the transactions that you enter into.

On Wednesday $24$ April $2024,$ you must close out your position and do so at the settlement price of the June $202410-$year bond futures contract.

Using the settlement price of the June $2410-$year bond futures contracts on the days that you trade, detail your financial position after you have entered and evaluate your trading performance.

Hedging with the SPI$200$ futures contract

On Wednesday $3$ April $2024,$ you will be notified that your company has a reasonably broadly based portfolio of Australian shares valued on that date at $$50,587,239.$ You will be required to seek protect the value of that portfolio as the company intends to liquidate the portfolio. You will seek to do this by entering into a number of June $2024$ SPI$200$ futures contracts as either a buyer or a seller.

On Wednesday $24$ April $2024,$ you will be notified that the portfolio of shares has been sold for $$55,987,431.$ The increase in the value of the portfolio was largely due the fact that it was not as broadly based as you had been told, and two companies that formed a large part of the portfolio had been subject to takeover offers during the period.

You must now close out your position and do so at the settlement price of the June $2024$ SPI$200$ futures contract.

Provide a report how the hedge performed and explain why you could not achieve a perfect hedge. Show all related calculations to demonstrate all relevant factors attributable to an imperfect hedge in this case.