You have a large gain on one of your Treasuries and want to sell it, but...

You have a large gain on one of your Treasuries and want to sell it, but you would like to defer the gain until the next tax year. How could you hedge in this situation?

Multiple Choice

Sell a Treasury futures contract.
Buy a Treasury futures contract.

Solutions

Expert Solution

Option A is correct: Sell a Treasury futures contract.

By selling a Treasury futures contract we are locking in the price today to sell our Treasuries in one year. This is exactly what we want - deferring the gain until next tax year. We do not need to worry if the Treasuries price decrease in future because we have locked in the price today.

Option B is incorrect because buying a Treasury futures contract will only increase the risk and doesn't provide hedge

jeff jeffy answered 1 year ago

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