Financial Markets and Institutions (2-downloads)

position.

To make our understanding of this contract more concrete, let’s consider what

happens when you buy or sell one of these Treasury bond futures contracts. Let’s say

that on February 1, you sell one $100,000 June contract at a price of 115 (that is,

$115,000). By selling this contract, you agree to deliver $100,000 face value of the

long-term Treasury bonds to the contract’s counterparty at the end of June for

$115,000. By buying the contract at a price of 115, the buyer has agreed to pay

$115,000 for the $100,000 face value of bonds when you deliver them at the end of

June. If interest rates on long-term bonds rise so that when the contract matures

at the end of June the price of these bonds has fallen to 110 ($110,000 per $100,000

of face value), the buyer of the contract will have lost $5,000 because he or she paid

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Part 7 The Management of Financial Institutions

$115,000 for the bonds but can sell them only for the market price of $110,000. But

you, the seller of the contract, will have gained $5,000 (less commission and

expenses) because you can now sell the bonds to the buyer for $115,000 but have

to pay only $110,000 for them in the market.

It is even easier to describe what happens to the parties who have purchased

futures contracts and those who have sold futures contracts if we recognize the

following fact: At the expiration date of a futures contract, the price of the