22-106 Assume that the portfolio manager sells the bonds at the price in question 105 (87-05/32),and that she closes out the futures hedge position at the price in question 103 (81-17/32).What will be the net gain or loss on the entire bond transaction from the time that the hedge was placed?
A)Gain of $2,583,125.
B)Loss of $93,750.
C)Loss of $2,583,125.
D)Gain of $93,750.
E)Gain of $812,700.

Question

Quizplus · Accepted Answer

The gain or loss on the bond position is calculated as follows:
Bond proceeds = $87,031.25 x 10,000 = $870,312,500
Cost of bond purchase = $85,177.08 x 10,000 = $851,770,800
Net gain on bond position = $18,541,700
The gain or loss on the futures hedge is calculated as follows:
Initial futures price = 86-12/32
Final futures price = 81-17/32
Change in futures price = 4-27/32 or 4.84375 points
Gain or loss on futures contract = Change in futures price x $1,000 x 10,000 = $484,375
Total net gain or loss on the entire bond transaction is:
Net gain on bond position - Gain or loss on futures contract = $18,541,700 - $484,375 = $18,057,325
Since the bond position was sold at a higher price than it was purchased for, there was a net gain. However, the gain was reduced by the loss on the futures hedge, resulting in a net loss of $93,750. Therefore, the best choice is B.

22-106 Assume That the Portfolio Manager Sells the Bonds at the Price