An investor buys 2 gold futures contracts at $350 per ounce. Each gold futures contract is based on 5,000 ounces of gold. At the same time he collateralizes his position by buying the required return amount of 10 year notes paying 3%. Two months later the price of gold is $347.40 and the price of te 10-year notes has not changed. What is the net gain or loss on the value of the investor’s position? A. $8500 loss B. $26,000 loss C. $26000 gain D. $34,500 gain
5000 oz of gold?! Where’s that? In the US, it’s 100 oz of gold so this is one mother big contract. Anyway, it’s $5000 per point = 2* loss of 2.6*5000 + interest earned so the answer is A without doing the math
A
may be silver?
silly me…maybe i’m too tired… this is embarrassing 
thanks anyway the question is in GOLD. maybe it’s from the mayan ruins.
The answer should be B, by the computations 2* (2.6*5000)
Never mind, i forgot the interest component!
well it says 2 months later. not at the end of year? so no interest payments have been paid.
Yeah…but you still collect interest by owning a T-note even if it hasn’t been paid.
answer?
A) …
does the interest + bond appreciation + face = $35,000,000 or just face = 35,000,000? or just interest + face = 35,000,000?
Market value of the notes.
market value of the notes when purchased = $35,000,000? do notes pay monthly? if so you know you are going to get (.03* purchase price of notes) / 6 worth of interest. wait, you dont have any idea whether you can sell the notes in 2 months for the required amount. what if interest rates go up by 1000bps and your t-notes are worth 30,000,000?
you can’t buy 10 year notes to collateralize a 2 month future, right?
Not 35 mil, but in the exact amout to your future position: 2*350*5000=3.5mil
it was a miscalc. but the concept it the same. how do you know you are going to have enough money in 2 months to collateralize the futures contract?
alscho, please tell me you made this up
joey, help me out here. you didn’t account for market appreciation/depreciation. you can’t do this can you?
answer is A. TSY note stays the same, so no capital appreciation or loss, but definitely 2 months of accrued interest, which offsets some of the loss on the commodity position. Do the math and you will see A is the answer.