Sandra Kapple asks Maria VanHusen about using futures contracts to protect the value of the Star Hospital Pension Plan’s bond portfolio if interest rates rise. VanHusen states:
a. “Selling a bond futures contract will generate positive cash flow in a rising interest rate environment prior to the maturity of the futures contract.”
b. “The cost of carry causes bond futures contracts to trade for a higher price than the spot price of the underlying bond prior to the maturity of the futures contract.” Comment on the accuracy of each of VanHusen’s two statements.