assume that the manager chooses to hedge the banks risk by buying (long) twenty

Question

assume that the manager chooses to hedge the banks risk by buying (long) twenty 5-year U.S. Treasury bond futures contracts with an expiration of September, 2013. Use the quotes given in the table above where the contract price is the Last quote and the apostrophe replaces the dash seen in your textbook. An initial margin is deposited for all contracts as noted in the text. You can ignore any potential margin calls on this problem.
a. If interest rates rise, will the bankers position be favorable? Why or why not?
b. If at the end of the contract (September 2013), the manager reverses the banks position (sells all 20 contracts) and the contract is now quoted at 11416, how much money was made or lost on the futures contract?
c. Given the initial margin, what is the holding period rate of return (i.e., profit/initial margin)?

5-Year U.S. Treasury Bond Futures Contract Quotes from 6/27/2013 CBT $100,000; pts 32nd of 100% Month Last Change Prior
Settle Open High Low Volume Updated Jun 2013 121'240 a +0'102 121'137 121'220 121'250 b 121'210 92 4:15:23 PM CT
6/27/2013 Sep 2013 121'015 b +0'112 120'222 120'237 121'030 120'210 666,982 4:15:23 PM CT
6/27/2013

Explanation / Answer

If the interest rate rises, the banker’s position will be unfavorable because the value of the future contracts will be reduced.

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