Conyers Bank holds U.S.Treasury bonds with a book value of $30 million.However, the U.S.Treasury bonds currently are worth $28,387,500. If T-bond futures prices decrease to 81-27/32^nds, what is the value of the futures hedge position? A)$81,270,000. B)$24,553,125. C)$26,700,000. D)$812,700. E)$28,387,500.

Question

Quizplus · Accepted Answer

Firstly, we need to calculate the market value of the bonds:
Market value = $28,387,500

Next, we need to calculate the number of T-bond futures contracts needed to hedge the position:
Number of contracts = Market value of bonds / (Futures price x Contract size)
                  = $28,387,500 / ($81,843.75 x 100)  (since the contract size is for 100 Treasury bonds)
                  = 3.45 or 3 contracts (rounded down)

Finally, we need to calculate the value of the futures hedge position:
Value of futures hedge position = Number of contracts x Futures price x Contract size
                                = 3 x ($81,843.75) x 100
                                = $24,553,125

Therefore, the best choice is B, which is the value of the futures hedge position.

Conyers Bank Holds U