Problem 2 30 year T-bond contract quote sheet on the CBOT website in May 2018 was The contract size is for $100,000 face value T-bonds Prev Last Change Settle Open HighLow Close 12112 001 12110 12108 12114 12105 121'4 119'30 +002 11925 11920 11925 11910 119'30 Jun Sep The risk manager at IDF Bank expects interest rates to increase, would he go long or short on a the June future contract (at open)? a) What is his profit or loss if at end of June the Future contract is quoted 110'18 b) What is his profit or loss if at end of June the Future contract is quoted 124'22? Problem 3 A cattle farmer expects to have 120,000 pounds of live cattle to sell in three months. The live- cattle futures contract on the Chicago Mercantile Exchange is for the delivery of 40,000 pounds of cattle. How can the farmer use the contract for hedging? From the farmer's viewpoimt, what are the pros and cons of hedging? The farmer can short 3 contracts that have 3 months to maturity. If the price of cattle falls, the in on the futures contract will offset the loss on the sale of the cattle. If the price of cattle rises, on the sale of the cattle will be offset by the loss on the futures contract. Using futures contracts to hedge has the advantage that it can at no cost reduce risk to almost zero. Its disadvantage is that the farmer no longer gains from favorable movements in cattle prices