Question

If an investor wants to hedge $3.5 million worth of Canadian bonds, and if he sells 50 bond futures contracts of equal amounts, then what is the size of each contract?

Answer 1

To hedge $3.5 million worth of Canadian bonds by selling 50 bond futures contracts, the size of each futures contract would be $70,000. This step is a part of portfolio risk management to safeguard against market volatility.

Step-by-step explanation:

To calculate the size of each futures contract that the investor needs to sell to hedge $3.5 million worth of Canadian bonds, we divide the total value of the bonds by the number of contracts. So, we take $3,500,000 and divide it by 50 contracts, resulting in the size of each contract.

Using the provided formula:

1. Divide the total value of the bonds by the number of contracts: $3,500,000 ÷ 50 = $70,000.
2. Each bond futures contract size would therefore be $70,000.

Through this calculation, the investor knows the size of each contract to execute the hedge accordingly. Understanding hedging and the mechanics behind futures contracts is vital in portfolio risk management and involves protecting investment positions against potential adverse market movements, such as currency exchange fluctuations.

Answer 2

The size of each futures contract used to hedge $3.5 million worth of Canadian bonds, when selling 50 contracts, is $70,000 per contract.

Step-by-step explanation:

If an investor wishes to hedge $3.5 million worth of Canadian bonds and sells 50 bond futures contracts, the size of each contract can be determined by dividing the total value of the bonds by the number of contracts. So, each contract would represent an equal portion of the $3.5 million total value. To find the size of each contract, you simply divide $3.5 million by 50 contracts, which equals $70,000 per contract.