Investor's Position Total Return Calculation

C

To calculate the total return of the position, we need to consider the changes in the value of the oil commodity futures contracts and the 10-year Treasury notes.

1. Oil Commodity Futures Contracts: The investor purchases oil commodity futures contracts worth $25 million. Assuming that oil prices rise by 10%, the value of the futures contracts would also increase by 10%. Therefore, the gain from the oil commodity futures contracts would be:

Gain from oil commodity futures contracts = 10% of $25 million = 0.10 * $25 million = $2.5 million

2. 10-Year Treasury Notes: The investor also purchases an equal amount of 10-year Treasury notes with an interest rate of 3.5%. The price of the notes remains unchanged, so there is no capital gain or loss from the notes themselves. However, the investor will earn interest income from the notes over the three-month period.

Interest income from 10-Year Treasury notes = Principal * Interest rate * Time = $25 million * 3.5% * (3/12) = $25 million * 0.035 * 0.25 = $218,750

Now, to calculate the total return of the position, we sum up the gain from the oil commodity futures contracts and the interest income from the 10-year Treasury notes:

Total return = Gain from oil commodity futures contracts + Interest income from 10-Year Treasury notes = $2.5 million + $218,750 = $2,718,750

Therefore, the closest option for the total return of the position after three months is C. $2,700,000.