You purchase a Treasury-bond futures contract with an initial margin requirement of 15% and a futures price of $115,098. The contract is traded on a $100,000 underlying par value bond. If the futures price falls to $108,000, what will be the percentage loss on your position?
Loss of 41.11%
Future’s price = $115,098
Margin requirement = 15%
Margin = $115,098 x 0.15 = $17,264.70
Future price fall to = $108,000
Total loss = $115,098 - $108, 000 = $7,098
Percentage loss = Total loss / Total price
= $7,098 / $17,264.70
a. Turn to Figure 17.1 and locate the contract on the Standard & Poor’s 500 Index. If the margin requirement is 10% of the futures price times the multiplier of $250, how much must you deposit with your broker to trade the September contract?
b. If the September futures price were to increase to 1,200, what percentage return would you earn on your net investment if you entered the long side of the contract at the price shown in the figure?
c. If the September futures price falls by 1%, what is the percentage gain or loss on your net investment?
a. How should the parity condition (Equation 17.2) for stocks be modified for futures contracts on Treasury bonds? What should play the role of the dividend yield in that equation?
b. In an environment with an upward-sloping yield curve, should T-bond futures prices on more distant contracts be higher or lower than those on near-term contracts?
c. Confirm your intuition by examining Figure 17.1.
Suppose the S&P 500 Index portfolio pays a dividend yield of 2% annually. The index currently is 1,200. The T-bill rate is 3%, and the S&P futures price for delivery in one year is $1,233. Construct an arbitrage strategy to exploit the mispricing and show that your profits one year hence will equal the mispricing in the futures market.
A corporation plans to issue $10 million of 10-year bonds in three months. At current yields the bonds would have modified duration of eight years. The T-note futures contract is selling at F0 = 100 and has modified duration of six years. How can the firm use this futures contract to hedge the risk surrounding the yield at which it will be able to sell its bonds? Both the bond and the contract are at par value.
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