Create a hedge against rising interest rates

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Reference no: EM132803014

Problem - HEDGING - Assume that interest rate futures maturing in March 2018 are selling for 125-145. It is now early June, and the current cost of debt to the high-risk biotech company is 11%. However, the firm's financial manager is concerned that interest rates will climb even higher in coming months.

a. Create a hedge against rising interest rates.

b. Assume that interest rates generally increase by 200 basis points. How well did your hedge perform?

c. What is a perfect hedge? Are most real-world hedges perfect? Explain.

Reference no: EM132803014

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