TX Financial (Questions 1 and 2). It is March and managers at TX Financial are c
ID: 2765172 • Letter: T
Question
TX Financial (Questions 1 and 2). It is March and managers at TX Financial are concerned about what an increase in interest rates will do to the value of the firm’s bond portfolio. Although the portfolio currently has a market value of $101.1 million, TX managers plan to liquidate $1.1 million in bonds in June to fund additional corporate loans. If interest rates increase to 6%, the bond will sell for $1 million with a loss of $100,000. Managers at TX sell 10 June T-bond contracts at 107-07 in March. Interest rates do increase, and in June management offsets its position by buying 10 June T-bond contracts at 104-16. 1. What is the dollar gain/loss to TX from its futures market operations? a. $72,800 b. $35,400 c. $27,187 d. $9,062 e. -$27,187 2. What is the net position for TX? a. $96,460 d. -$72,812 b. $64,600 c. $27,187 e. -$90,620
Explanation / Answer
Loss on cash transaction: $100,000
Gain on futures transaction: 109,156.25 – 100,093.75 = 9062.5 (per contract) (answer is d.)
Loss: 9062.50(10) = -$90,620 ( Answer is e.)
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