Unformatted text preview: The value of each futures contract will be $99,344 at this higher interest rate. This represents a decrease of $111,781 $99,344 = $12,437 for each contract. Since TS has sold futures contracts, this represents a profit to TS. The total profit from the futures contracts is 45($12,437) = $559,665. TS will lose $494,819 on the bonds it issues but gain $559,665 on its futures contracts. The net hedging gain is $559,665 - $494,819 = $64,846. Thus TS will end up just a little bit better off if interest rates increase by 1%. Note that if interest rates were to decrease instead, then TS would gain on the bonds it issues but lose on its futures contracts....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
- Spring '08