Question

Tree Row Bank wishes to take a position in Treasury bondfutures contracts,which currently have a quote of 95-040.Tree Row thinks interest rates will go up over the period ofinvestment. a. Should the bank go long or short on the futurescontracts? - if interest rate increases over the period of investment,treasury bond prices will decrease. Thus, Tree row shouldtake a short position in the futures contracts on the treasurybonds. As T-bond prices go down, so will T-bond futureprices

Answer 1

Answer:A.)If interest rates increase over the period of investment, Treasury bond prices will decrease. Thus, Tree Row should take a short position in the futures contracts on the Treasury bonds. As T-bond prices go down, so will T-bond futures prices.

Explanation:b. Given a short position: Sale price of futures = 95-040 = 95 4/32% x $100,000 = $95,125

 - Purchase price of futures = 94-280 = 94 28/32% x $100,000 = $94,875

Net profit = $250

c. Given a short position: Sale price of futures = 95-040 = 95 4/32% x $100,000 = $95,125.00

 - Purchase price of futures = 95-210 = 95 21/32% x $100,000 =$95,656.25

Net profit = -$ 531.25