Clarke 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 declined to 97-20, Clarke would make a ____ of $____ from closing out the futures position.

Question

Quizplus · Accepted Answer

Clarke sells 40 futures contracts. The initial price is 99-12 (or 99.375 in decimal), and the closing price is 97-20 (or 97.625 in decimal). The profit per contract is (99.375 - 97.625) = 1.75. Since each contract represents $100,000, the total profit is 1.75 * $100,000 * 40 = $70,000.

Clarke Plans to Satisfy Cash Needs in Nine Months by Selling