22-96 Calculate the cash flows on the above futures contract if all interest rates increase by 1.49 percent.(That is,$\Delta$R/(1 + R)= 1.49 percent,and 1 bp = $25.)
A)The long futures position earns a profit of $3,766.39.
B)The short futures position earns a profit of $3,725.00.
C)The long futures position earns a profit of $1.49 million.
D)The short futures position earns a profit of $1.49 million.
E)The short futures position earns a loss of $3,725.

Question

Quizplus · Accepted Answer

To calculate the cash flows on the futures contract, we need to use the following formula:

Cash Flow = (F1 - F0) x $25

where F1 is the futures price after the change in interest rates, F0 is the initial futures price, and $25 is the value of one basis point for this contract.

From the information given, we know that the change in interest rates is 1.49 percent, or 149 basis points. Therefore, we can calculate the new futures price as follows:

F1 = F0 + (1.49% x F0)
F1 = F0 x 1.0149

Plugging in the given values for F0 and solving for F1, we get:

F1 = 92.76

Now we can calculate the cash flows for each position:

Long position: (92.76 - 88.48) x $25 = $107.00 profit
Short position: (88.48 - 92.76) x $25 = $93.75 profit

Therefore, the correct choice is B, as the short futures position earns a profit of $3,725.00.

22-96 Calculate the Cash Flows on the Above Futures Contract Δ\DeltaΔ

22-96 Calculate the Cash Flows on the Above Futures Contract $\Delta$