Question

You want to liquidate your position now. The current future price is $101. Now there are six securities in the market.

1. A corporate bond with 10% annual coupon rate, and the market price $100 (for $100 face value).
2. A 16 year Treasury bond with 5.4% coupon rate (paid semiannually), and the market price is $91.740.
3. A 12 year Treasury bond with 10% coupon rate (paid semiannually), and the market price is $233.127.
4. A 20 year Treasury strips, and the market price is $23.479.
5. A 20 year Treasury bond with 6% coupon rate (paid semiannually), and the market price is $110.677.
6. A 5 year Treasury bond with 6% coupon rate (paid semiannually), and the market price is $103.523.

What is your return/loss (assume 0 accrued interest)?

Answer 1

Current Future price is $101.00 and if we purchase future ie F+ at $101.00 ,profit is if the market price goes above

$101.00 and loss if comes down below $101.00

First Corporate bond: The market price of the bond is $100.00..So there is a loss

= $(101.00-100.00)

= $1

Second 16years Treasury Bond: The market price goes down to $91.740..So there is a loss

=$(101.00-91.740)

= $9.26

Third 12 years Treasury Bond : The market price goes to $233.127.So it is profitable

= $(233.127-101.00)

= $ 132.127

Fourth 23years Treasury strips : Market price comes down to $23.479..So there is a loss

=$(101.00-23.479)

= $77.521

Fifth 20years Treasury Bond : Market price of the Bond goes upto $110.677..So it is profitable

=$(110.677-101.00)

= $9.677

Sixth 5 years Treasury Bond : Market price goes up to $103.523.So it is profitable

= $(103.523-101.00)

= $2.523

Therefore, total Profit =$ (132.127+9.677+2.523)

= $ 144.327

total loss = $(1+9.26+77.521)

= $87.781

Net profit = $(144.327-87.781)

= $56.546