Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 110 − 100. Dud
ley Savings thinks interest rates will go down over the period of investment. The face value of the bond underlying the futures contract is $100,000.
a. Should the bank go long or short on the futures contracts?
b. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts increases to 110 − 250. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
c. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts decreases to 109 − 310. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
a. Should the bank go long or short on the futures contracts?
b. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts increases to 110 − 250. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
c. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts decreases to 109 − 310. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
1 answer:
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Answer:
a. 208.57 units
b. 104.29 units
Explanation:
a. The computation of the economic order quantity is shown below:
= 208.57 units
b. And, the average inventory is
= Economic order quantity ÷ 2
= 208.57 units ÷ 2
= 104.29 units
We simply applied the above formulas for calculation of the economic order quantity and the average inventory and the same is shown above