If an investor buys a three-year Commonwealth Treasury bond futures contract at 6 per cent and on the delivery date the interest rate of Treasury bonds is lower than they expected at 7 per cent,they will have:
A) gained money on their long position.
B) lost money on their long position.
C) lost money on their short position.
D) gained money on their short position.

Question

Quizplus · Accepted Answer

The investor has bought the futures contract at a rate of 6% for a three-year Commonwealth Treasury bond. This means they are long on the contract, meaning they will profit if interest rates fall. However, if the interest rate on the delivery date is lower than expected, at 7%, the investor will have lost money on their long position, as they are now locked into the higher rate of 6% instead of being able to take advantage of the lower rate of 7%. Therefore, the correct choice is B.

If an Investor Buys a Three-Year Commonwealth Treasury Bond Futures