You are a corporate treasurer who will purchase $1 million of bonds for the sinking fund in 3 months. You believe rates will soon fall, and you would like to repurchase the company’s sinking fund bonds (which currently are selling below par) in advance of requirements. Unfortunately, you must obtain approval from the board of directors for such a purchase, and this can take up to 2 months. What action can you take in the futures market to hedge any adverse movements in bond yields and prices until you can actually buy the bonds? Will you be long or short? Why? A qualitative answer is fine.

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Asked Mar 10, 2020
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You are a corporate treasurer who will purchase $1 million of bonds for the sinking fund in 3 months. You believe rates will soon fall, and you would like to repurchase the company’s
sinking fund bonds (which currently are selling below par) in advance of requirements. Unfortunately, you must obtain approval from the board of directors for such a purchase, and this can take up to 2 months. What action can you take in the futures market to hedge any adverse movements in bond yields and prices until you can actually buy the bonds? Will you be long or short? Why? A qualitative answer is fine.

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Expert Answer

Introduction

Futures contract is used for hedging adverse price movements. In future contracts a specified price is locked and the difference between market price and specified price is received or paid according to the investor's position.

In case, investor has long position (buyer of asse...

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