On August 2, a securities dealer, Ms. Cindy Zaicko, responsible for a $10 million bond portfolio is concerned that interest rates are expected to be highly volatile over the next 3 months. The fund manager decides to use Treasury bond futures to hedge the value of the bond portfolio. The current price on a December T-bond futures is 91-22. During the period August 2 to November 2, interest rates climbed rapidly causing the bond portfolio value to drop as prices of T-Bonds declined from 100-00 to 95-11. On November 2, the December T-Bond futures contract was priced at 88-26. The portfolio was sold at its market value on Nov. 2. The minimum contract size for the T-Bond futures contract is $100,000 and the minimum price change is $31.25 per tick of 1/32.
a. State what kind of hedge could Ms. Zaicko take and why.
b. Compute the opportunity cost of waiting to sell the portfolio. Describe all transactions clearly.
c. Compute gain or loss in the futures market after describing the transactions.
d. Calculate the effective revenue with the hedge. Describe all transactions clearly.