USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
In late January 2004, The Union Cosmos Company is considering the sale of $100 million in 10-year bonds that will probably be rated AAA like the firm's other bond issues. The firm is anxious to proceed at today's rate of 10.5 percent. As treasurer, you know that it will take until sometime in April to get the issue registered and sold. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts each representing $100,000.

-Refer to Exhibit 15.1. What is the dollar gain or loss assuming that future conditions described in Case 2 actually occur? (Ignore commissions and margin costs).
A) $2,965,000.00 gain
B) $45,500.00 gain
C) $2,965,000.00 loss
D) $45,500.00 loss
E) $0

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
In late January 2004, The Union Cosmos Company is considering the sale of $100 million in 10-year bonds that will probably be rated AAA like the firm's other bond issues. The firm is anxious to proceed at today's rate of 10.5 percent. As treasurer, you know that it will take until sometime in April to get the issue registered and sold. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts each representing $100,000.
 
-Refer to Exhibit 15.1. What is the dollar gain or loss assuming that future conditions described in Case 2 actually occur? (Ignore commissions and margin costs).
A) $2,965,000.00 gain 
B) $45,500.00 gain 
C) $2,965,000.00 loss 
D) $45,500.00 loss 
E) $0

Quizplus · Accepted Answer

The correct answer is a $45,500.00 gain, as this option reflects the scenario where the future conditions described in Case 2 result in a positive financial outcome.