The client of an investment fund will come into a large amount of money in three weeks, and instructs

the fund to buy $15,000,000 principal amount of a particular bond whose modified dur is -8.3

when the money is available. Because of the risk that the price of the bond may increase during

those three weeks, the fund manager to hedge the purchase of this bond using 10-year T-note

futures. The modified duration of the futures contract is -6.3.The "size" of the futures contract is

$100,000.

Target bond: Modified Duration = -8.3. Percentage-of-par Price is 108.58 (1.0858)

10-year T-note futures: Modified Duration = -6.3. Percentage-of-Par Price is 137.25 (1.3725)

Target bond: Percentage-of-par price 112.00 (1.1200)

10-year T-note futures: Percentage-of-par price 140.40 (1.4040)

2. What is the anticipated transaction?
4. What can be done to hedge this risk? (buy/sell? buy/sell what? how much?)
6. How much the does the firm pay/receive when it carries out the anticipated transaction?
8. What does it do to offset the hedge position (what does is buy/sell? How much? At what price?) Did the hedge transaction produce a profit or a loss, and how much?

5. Considering the result of the anticipated transaction and the hedge, what is the effective amount paid for the bonds and the effective price (in percentage of par)of the overall transaction?