Treasury bond future settles and Exchange rate
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Problem 3. A Treasury bond futures contract settles at 105-8.
a. What is the present value of the futures contract?
b. If the contract settles at 105-8, are current market interest rates higher or lower than the standardized rate on a futures contract? Explain.
c. What is the implied annual interest rate on the futures contract?
d. Calculate the new value of the futures contract if interest rates increase by 1 percentage point annually.
e. Calculate your profit or loss if you sold a futures contract at 105-8 and purchased an offsetting contract when rates increased by 1 percentage point annually.
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Solution Summary
The solution
1) calculates the present value of the futures contract
2) determines whether current market interest rates are higher or lower than the standardized rate on a futures contract
3) calculates implied annual interest rate on the futures contract
4) calculates the new value of the futures contract if interest rates increase by 1 percentage point annually
5) calculate profit or loss in selling a futures contract at 105-8 and purchasing an offsetting contract when rates increase by 1 percentage point annually
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