The manager at the Coffeeland Company is concerned about a decrease in interest rates as they are going to purchase a one million in 6% 15-year bonds in September. If interest rates decrease by 2%, the Coffeeland Co. will have to pay $230,000 more. Coffeelands management therefore purchases twenty 12 December Treasury bond contracts at 102-15 (pts 64nds of 100%) in September. Interest rates drop by 1 percent and in December Greenlands management offsets its position by selling all the 12 December Treasury bond contracts at 110-04 (pts 64nds of 100%). Note that each contract contains 1000 shares of bonds.

a. What is the dollar gain/loss to Greenland from the combined cash and futures market operations described above?

b. What is the respective basis at the initiation and termination of the hedge?

c. Illustrate how the dollar return is related to the change in the basis from termination to initiation. Does the company incur a loss or gain due to change in basis? By how much?