Question

Suppose you purchase a Treasury bond futures contract at a price of 95 percent of the face value, $100,000.

a. What is your obligation when you purchase this futures contract?
b. Assume that the Treasury bond futures price falls to 94 percent. What is your loss or gain?
c. Assume that the Treasury bond futures price rises to 97. What is your loss or gain?

Answer 1

Result:

A B 2 a. Obligation Face value of Treasury bond future contract $100,000 Purchase price in % of face value 95% Purchase price in $ $95,000 In future contract, the buyer has obligation to exercise the contract. Hence, there is obligation to exercise this future contract of $100,000 face value of Treasury bond at the time of maturity at a price of $95,000. $95,000 b. loss/gain when future price falls to 94% Purchase price in $ Future price in % of face value Future price in $ loss/gain 94% $94,000 ($1,000) Loss c. loss/gain when future price rises to 97% Purchase price in $ Future price in % of face value Future price in $ loss/gain $95,000 97% $97,000 $2,000 Gain

Excel:

А a. Obligation Face value of Treasury bond future contract 100000 Purchase price in % of face value 0.95 Purchase price in $ =B2*B3 In future contract, the buyer has obligation to exercise the contract. Hence, there is obligation to exercise this future contract of $100,000 face value of Treasury bond at the time of maturity at a price of $95,000. b. loss/gain when future price falls to 94% Purchase price in $ Future price in % of face value Future price in $ loss/gain =B4 0.94 =B9*B2 =B10-B8 Loss c. loss/gain when future price rises to 97% Purchase price in $ Future price in % of face value Future price in $ loss/gain =B4 0.97 =B15*B2 =B16-B14 Gain