On February 1, a firm learns that it will have $10 million available on JUN 25. The

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Question:

On February 1, a firm learns that it will have $10 million available on JUN 25.

The firm’s investment manager (IM) decides that the $10 million will be invested in a corporate bond which currently sells for $80 per $100 face value. This bond’s duration is 10 and its yield is 12%. Currently, the CBT T-bond futures for JUN delivery sells for 72–06, its duration is 9 and its yield is 11%, while the CBT’s T-bond futures for SEP delivery sells for 71-08, its duration is 8 and its yield is 12%.

Remember that one T-bond futures covers $100,000 face value.

A. Use a time table to show how IM opens a hedge on February 1, using the price sensitivity hedge ratio.

B. On JUN 25, the firm buys the corporate bond for $84 per $100 face value. The T- bond futures prices on that date are 76-11 for JUN delivery and 76-29 for SEP delivery.

show the result of the hedge and calculate the total capital raised by the firm.