On January 1, the listed spot and futures prices of a Treasury bond were 95-4 and 95-6. You sold $100,000 par value Treasury bonds and purchased one Treasury bond futures contract. One month later, the listed spot price and futures prices were 95 and 94-4, respectively. If you were to liquidate your position, your profits would be a
A) $125 loss.
B) $125 profit.
C) $1,060.50 loss.
D) $1,062.50 profit.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The profit or loss from the spot market transaction and the futures market transaction must be calculated separately and then combined to determine the overall profit or loss. The spot market transaction involves selling the Treasury bonds at the initial spot price and buying them back at the later spot price. The futures market transaction involves buying a futures contract at the initial futures price and selling it at the later futures price. The calculations for each market must consider the price changes in terms of 32nds of a dollar, as Treasury bond prices are quoted in this manner. The overall profit or loss is the sum of the profit or loss from each transaction. The provided choices do not accurately reflect the correct calculation based on the given price changes in the spot and futures markets.

On January 1, the Listed Spot and Futures Prices of a Treasury