Dudley Savings Bank wishes to take a position in Treasury bond futures contracts

Question

Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 121 100. Dudley Savings thinks interest rates will go down over the period of investment. The face value of the bond underlying the futures contract is $100,000.

A. Should the bank go long or short on the futures contracts?

B. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts increases to 121 210. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Net Profit $______________

C. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts decreases to 120 270. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Net Profit $______________

Explanation / Answer

1) If interest rate go down bond prices will go up thus bond futures should be bought so that they can be sold at a higher price

2)Profit = face value*(new price-old price)

=100000*(121+21/32-121-10/32) = 34375

3)

Profit = face value*(new price-old price)

=100000*(120+27/32-121-10/32) = -46875

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