Question

You purchased a Treasury bond futures contract at a price of 92 percent of the face value, $100,000.

a. What is your obligation when you purchase this futures contract?
b. Assume that the Treasury bond futures price falls to 90.60 percent. What is your loss or gain?
c. Assume that the Treasury bond futures price rises to 93.70 percent. What is your loss or gain?
  

Answer 1

Solution:

a.The obligation on the purchaser of a Futures contract is to take the delivery of the Treasury bond futures at the contracted Price.

The contracted price is calculated as follows:

The contracted price = Face value of the Treasury bond futures * Percentage of Face value

(Since Price of the Treasury bond futures is calculated as percent of Face Value)

As per the information given in the question we have

Face value of the Treasury bond futures= $ 100,000 ;

Percentage of Face value = 92 %

Applying the above information in the formula we have

= $ 100,000 * 92 %

= $ 92,000

Thus the obligation on the purchaser of this futures contract is to take delivery of the Treasury bond futures at a contracted price of $ 92,000.

b. The Market price of a futures contract is calculated as follows:

= Face value of the Treasury bond futures * Price of the Treasury bond futures expressed as a Percent of Face value

As per the information given in the question we have

Face value of the Treasury bond futures = $ 100,000 ;

Market Price of the Treasury bond futures expressed as a Percent of Face value = 90.60 %

Thus the market price of the Treasury bond futures = $ 100,000 * 90.60 %

= $ 90,600

We know that the contracted price of the Treasury bond futures is = $ 92,000

Although the market price of the Treasury bond futures is lower as compared to the price of the Treasury bond futures as per futures contract, it is the obligation of the purchaser to pay the contracted price of $ 92,000 as per the Futures contract.

The gain / loss on the purchase of the treasury bond futures is calculated as follows :

= Market price of the Treasury bond futures - Contracted price of the Treasury bond futures as per futures contract

= $ 90,600 - $ 92,000

= - $ 1,400

If the Treasury bond futures price falls to 90.60 percent, the loss = - $ 1,400.

c. The Market price of a futures contract is calculated as follows:

= Face value of the Treasury bond futures * Price of the Treasury bond futures expressed as a Percent of Face value

As per the information given in the question we have

Face value of the Treasury bond futures = $ 100,000 ;

Market Price of the Treasury bond futures expressed as a Percent of Face value = 93.70 %

Thus the market price of the Treasury bond futures = $ 100,000 * 93.70 %

= $ 93,700

We know that the contracted price of the Treasury bond futures is = $ 92,000

The gain / loss on the purchase of the treasury bond futures is calculated as follows :

= Market price of the Treasury bond futures - Contracted price of the Treasury bond futures as per futures contract

= $ 93,700 - $ 92,000

= $ 1,700

If the Treasury bond futures price rises to 93.70 percent, the gain = $ 1,700.