Hedging interest rates using futures.
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In your portfolio you have $1 million of 20 year, 8 5/8 percent bonds which are selling at 83.15 (or 83 15/32) against this position. Because you feel interest rates will rise you sell 10 bond futures at 81.15 (or 81 15/32) against this position. Two months later you decide to close your position. The bonds have fallen to 78 and the futures contract are at 75.16 (75 16/32). Disregarding margin and transaction costs, what is your gain or loss?
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Solution Summary
Gain/ loss on a portfolio that is hedged using futures contracts has been calculated.
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Question: In your portfolio you have $1 million of 20 year, 8 5/8 percent bonds which are selling at 83.15 (or 83 15/32) against this position. Because you feel interest rates will rise you sell 10 bond futures at 81.15 (or 81 15/32) against this position. Two months later you decide to close your position. The bonds have fallen to 78 and the futures contract are at 75.16 (75 16/32). Disregarding margin and transaction costs, what is ...
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