QUESTION 9

1. MSU Bank considers buying $1 million of 15-year, 6% bonds in three months. If interest rates drop from 6% to 5.5%, the price of these bonds will increase from $1 million to $1,050,623.25. MSU buys ten December Treasury bond futures contract at the opening price 156-10 on September 25 to hedge its exposure to declining interest rates. Suppose interest rates do decline, and in December MSU s management offsets its positon by selling ten December Treasury bond contracts at 160-165. What is the dollar gain/loss to MSU Bank from the combined cash and futures market operations described above?

   	a.	$6,428.05
   	b.	-$8,591.95
   	c.	-$6,428.05
   	d.	$8,591.95

QUESTION 10

1. Following Question 9, what is the portion of dollar gain/loss due to change in basis?

   	a.	$642.80
   	b.	-$642.80
   	c.	$859.20
   	d.	-$859.20