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What is the basis at the initiation of the hedge

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Reference no: EM131190788

Wish Financial Services is concerned about what an increas in interest rates will do to the value of its bonds. Current value of portfolio is $ 101.1 million and the bank intends to liquidate $ 1.1 million in bonds in July. If interest rates increase to 6% the bond will sell at a loss of $ 100 000 for $ 1 million. The bank sells 10July bond contracts at 109-050 in March. Interest rates do increase and the bank offsets its position by buying 10 treasury bond contracts at 100-030.

1. What is the dollar gain or loss to the bank from the combined cash and futures market operations discussed above?

2. What is the basis at the initiation of the hedge?

3. What is the basis at the termination of the hedge?

Reference no: EM131190788

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