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What is a naive hedge

Response to the following problems:

1. What is a naive hedge? How does a naive hedge protect an FI from risk?

2. Suppose that you purchase a Treasury bond futures contract at $95 per $100 of face value

a. What is your obligation when you purchase this futures contract?

b. If an FI purchases this contract, in what kind of hedge is it engaged?

c. Assume that the Treasury bond futures price falls to 94. What is your loss or gain?

d. Assume that the Treasury bond futures price rises to 97. Mark your position to market.

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