Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The manager at the Country Bank is concerned about a decrease in interest rates as they are going to purchase a one million 5% 15-year
The manager at the Country Bank is concerned about a decrease in interest rates as they are going to purchase a one million 5% 15-year bonds in September. If interest rates decrease by 2%, the Country Bank will have to pay $66,000 more. Country Bank management therefore purchases ten December Treasury bond contracts at 100-150 (pts 32nds of 100%) in September. Interest rates drop by 2 percent and in December Country Bank management offsets its position by selling all the December Treasury bond contracts at 106-040 (pts 32nds of 100%).
- What is the dollar gain/loss to Country Bank from the combined cash and futures market operations described above?
- What is the respective basis at the initiation and termination of the hedge?
- 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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started