Question

Use the information in the table below in solving this problem.
• Situation A. A fixed- income manager holding a $ 20 million market value position of U. S. Treasury 1134 percent bonds maturing November 15, 2024, expects the economic growth rate and the inflation rate to be above market expectations in the near future. Institutional rigidities prevent any existing bonds in the portfolio from being sold in the cash market.
• Situation B. The treasurer of XYZ Corporation has recently become convinced that interest rates will decline in the near future. He believes it is an opportune time to purchase his company’s sinking fund bonds in advance of requirements since these bonds are trading at a discount from par value. He is preparing to purchase in the open market $ 20 million par value XYZ Corporation 1212 percent bonds maturing June 1, 2015. A $ 20 million par value position of these bonds is currently offered in the open market at 93. Unfortunately, the treasurer must obtain approval from the board of directors for such a purchase, and this approval process can take up to two months. The board of directors’ approval in this instance is only a formality.
For each of these situations, demonstrate how interest rate risk can be hedged using the Treasury bond futures contract. Show all calculations, including the number of futures contracts used.


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  • CreatedJune 21, 2015
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