Question: A fund manager anticipates purchasing 500 of a AA rated corporate bond with a face value of $1,000, 3% coupon rate, 12 years of maturity,

A fund manager anticipates purchasing 500 of a AA rated corporate bond with a face value of $1,000, 3% coupon rate, 12 years of maturity, modified duration of 9 and forward price of $901 in 3 months. The manager is afraid that in the meantime interest rates might fall and the bond's price rises. There are no forward or futures contracts available for the bond, but the manager decides to hedge against interest rate movements using a T-bond futures contract with futures price of $104,703 and modified duration of 7.

Calculate the profit/loss from the hedge transaction, if in three months the futures contract's price is 118,921 and the AA rated corporate bond's price is 1,145.

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