Q7 A low risk tolerance investor is holding $600,000 worth of US Government Treasury bonds. The investor is concerned over the tapering measures possible to kick off by year end, hence, he would like to do something to protect his portfolio. His financial advisor advises him to set up a hedge using T-bond future contracts. Assuming that these contracts are trading at 111'06, answer the following questions. a. Briefly describe how the investor would set up this hedge. Would he go long or short? Compute the number of contracts he would need. (2 marks) b. It is now six months later, and rates have indeed gone up. The investor's US government treasury bonds are now quoted at 93 and T-bond futures used in the hedge are now trading at 98'00. Show what has happened to the value of the bond portfolio and profit/loss made on the futures hedge assuming that the discount rate is 5% per annum. (7 marks) c. Explain whether this is a successful hedge. (2 marks)