Final answer:
The investor would experience a total net loss of $760 from both the Treasury bond spot market transaction and the Treasury bond futures contract if they were to liquidate their position.
Step-by-step explanation:
The subject of this question is Business, specifically focusing on the concept of hedging with Treasury bonds and futures contracts. The question involves an investor who purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract, then is considering the profit or loss after changes in market prices.
On January 1, the spot price of the Treasury bond was 93.8, and the futures price was 93.13. The investor bought the bonds at the spot price of 93.8 and one month later could sell them at a spot price of 94, resulting in a profit of (94 - 93.8) = 0.2 per $1 of par value. For $100,000 of par value, this results in a profit of 0.2% of $100,000 = $200.
Conversely, the investor had sold a futures contract at 93.13, and if they were to close this position a month later, they would have to buy it back at a higher futures price of 94.09, incurring a loss of (94.09 - 93.13) = 0.96 per $1 of par value. Assuming the standard contract size of a Treasury bond futures is $100,000, this results in a loss of 0.96% of $100,000 = $960.
Therefore, to liquidate the position, the investor would have a profit from the spot market of $200 and a loss from the futures market of $960, resulting in a net loss of ($960 - $200) = $760.