Calculate the overall net gain or loss

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The Telex Company plans to issue $20,000,000 of 10-year bonds at par next June, with semiannual interest payments. The company's current cost of debt is 12% . However, the firm's financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. See the settlement data below for t-bond futures. (Note: One standard future contract is $100,000) Delivery Month Open High Low Settle Change Open Interest (1) (2) (3) (4) (5) (6) (7) Dec 102'13 102'25 102'15 102'17 +2 489,777 Mar 102'02 102'25 101'01 101'01 -5 105,033 June 101'13 101'15 100'02 100'30 -1 15,002 d. Calculate the implied interest rate based on the current value of the futures position. e. Interest rates increase as expected, by 2 percentage points. Calculate the present value of the futures position based on the rate calculated above plus the 2 points. f. Calculate the gain or loss on the futures position. g. Calculate the overall net gain or loss. h. Is this problem an example of a perfect hedge or a cross hedge? Is it an example of speculation or hedging? Why?

Reference no: EM131616197

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