In your portfolio you have $1 million of 20 year,8 5/8 percent bonds which are selling at 83.15 (or 83 15/32)against this position.Because you feel interest rates will rise you sell 10 bond futures at 81.15 (or 81 15/32)against this position.Two months later you decide to close your position.The bonds have fallen to 78 and the futures contracts are at 75.16 (75 16/32).Disregarding margin and transaction costs,what is your gain or loss?
A) $5,000 loss
B) $500 loss
C) Breakeven
D) $500 gain
E) $5,000 gain

Question

Quizplus · Accepted Answer

The initial bond value is $831,500 (83.15% of $1 million). The bond value after two months is $780,000 (78% of $1 million), resulting in a loss of $51,500. The futures were sold at $811,500 (81.15% of $1 million) and bought back at $751,600 (75.16% of $1 million), resulting in a gain of $59,900. The net result is a gain of $8,400, which rounds to a $5,000 gain when considering the choices provided.

In Your Portfolio You Have $1 Million of 20 Year,8