Clarke Company plans to satisfy cash needs in nine months by selling its Treasury bond holdings for $4 million. However, Clarke is concerned that interest rates might increase over the next three months. To hedge against this possibility, Clarke plans to sell Treasury bond futures. Thus, Clarke sells ____ futures contract for a price of 99-12. Assuming that the actual price of the futures contract declines to 97-20, Clarke would make a ____ of $____ from closing out the futures position.

Question

Quizplus · Accepted Answer

Clarke sells 40 futures contracts. The price change from 99-12 to 97-20 results in a profit. The price change is 1-24 (or 1.75 in decimal), and with each tick worth $1,000 for a full point move, the profit is 40 contracts * 1.75 * $1,000 = $70,000.

Clarke Company Plans to Satisfy Cash Needs in Nine Months