On DEC 1, 03 a Treasury bond dealer decides to sell $50 million face value of T-bonds. The sale will take place on FEB 2, 04. On DEC 1, 03 this T-bond is trading for $102/$100 face value; its duration is 8yrs and its yield is 11%. Also, the T-bond futures for MAR 04 delivery are trading for 73–13, their duration is 9yrs and they yield 15%.

2.1 Use a time table to describe the hedge opened by the T-bond dealer on DEC 1, 03 using the price sensitivity ratio.

2.2 Suppose that on FEB 2, 04 the T-bond is trading for $97/$100 face value and the T-bond futures for MAR 04 delivery is trading for 62 – 07. Using the same time table you used in 5.1, show the dealer activities on FEB 2, 04 and the total cash flow.

2.3 Suppose that on FEB 2, 04 the T-bond is trading for $105/$100 face value and the T-bond futures for MAR 04 delivery is trading for 77 - 09. Using the same time table you used in 5.1, show the dealer activities on FEB 2, 04 and the total cash flow.

Answer rating: 100% (QA)

21 Price sensitivity ratio 13894 22 Total cash flow 619 23 Total cash flow 08... View the full answer