A mortgage banker has forward contracts to lend $12 million at 4.5 percent for 15 years.What position in Treasury bond futures does this banker need to hedge the interest rate risk?
A)Short position in 12 contracts
B)Short position in 120 contracts
C)Long position in 12 contracts
D)Long position in 120 contracts
E)Long position in 1,200 contracts

Question

Quizplus · Accepted Answer

To hedge the interest rate risk, the mortgage banker needs to take a short position in Treasury bond futures. Each Treasury bond futures contract represents a face value of $100,000, so to hedge a $12 million loan portfolio, the banker needs to sell 120 contracts (12,000,000/100,000 = 120).

A Mortgage Banker Has Forward Contracts to Lend $12 Million