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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 15year bond and at least one of the other two bonds. For simplicity, I will choose the 5year and 15year bonds. 50% in each bond will give me a target duration of 10 years. Other fractions are also possible. 1b. Price of the 5year bond = 1000/(1.05)^5 = $783.53 Price of the 7year bond = 1000/(1.05)^7 = $710.68 Price of the 15year bond = 1000/(1.05)^10 = $481.02 $500,000 each must be invested in the 5year and 15year bonds because 50% in each bond has to be invested. Thus we need 638 5year bonds and 1039 15year 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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 '08
 CGiles
 crude oil, futures price, 15year bonds, target duration

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