JP Morgan Chase & Co. bank plans on taking a position in Treasury bond futures contracts, which currently have a quote of 105. JP Morgan Chase & Co. bank expects the interest rates to increase over the period of the investment. (The investment in T-bonds is for $100,000.)
a. Think about what happens to the price of the Treasury bond when interest rates do increase. Should the bank go long or short on the futures contract? Intuitively explain why.
b. Calculate the net profit/loss of JP Morgan Chase & Co. bank if the price of the futures contracts decreases to 100. (Show your calculations)
c. Graphically show your answers to part (b) in the profit and loss diagram for the futures contract. In the graph be sure to add the T-bond quote, the payoff structure for the futures contract, the profit/loss amount on the y-axis.