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20-2 Assume a portfolio manager holds $1 million of 5.2 percent Treasury bonds due 2010-2015 The current market price is 76-2, for a yield of 6.95 percent. The manager fears a rise in interest rates in the next three months and wishes to protect this position against such a rise by hedging in futures,
a. Ignoring weighted hedges, what should the manager do?
b. Assume T-bond futures contracts are available at 68, and the price 3 months later is 59-12. If the manager constructs the correct hedge, what is the gain or loss on this position?
c. The price of the Treasury bonds 3 months later is 67-8. What is the gain or loss on this cash position?
d. What is the net effect of this hedge?
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