Question

You are a corporate treasurer who will purchase $1 million of bonds for the sinking fund in three months. You believe rates soon will fall and 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 two months. a. What action can you take in the futures market to hedge any adverse movements in bond yields and prices until you actually can buy the bonds? b. Will you be long or short? Why?

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a)

I want to buy bonds worth a million dollars, but I can't because of management restrictions. To solve this problem, I would buy treasury bonds of a future contract worth a similar amount.

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