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Unformatted text preview: What is the net loss or gain on your futures position? Show your work. Key 1a. To get an average duration of 10 years, you must choose the 15-year bond and at least one of the other two bonds. For simplicity, I will choose the 5-year and 15-year bonds. 50% in each bond will give me a target duration of 10 years. Other fractions are also possible. 1b. Price of the 5-year bond = 1000/(1.05)^5 = $783.53 Price of the 7-year bond = 1000/(1.05)^7 = $710.68 Price of the 15-year bond = 1000/(1.05)^10 = $481.02 $500,000 each must be invested in the 5-year and 15-year bonds because 50% in each bond has to be invested. Thus we need 638 5-year bonds and 1039 15-year bonds. 2. Short one contract at $51.50 today. Futures price when you close the contract = $50.75. Difference = $0.75. Since you were short, you gain $0.75 per barrel, for a total profit of $750. The spot prices are irrelevant....
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This note was uploaded on 09/22/2010 for the course FIN 3055 at Virginia Tech.