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The Zinn Company plans to issue $10,000,000 of 20-year bonds in June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, 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. The following data are available:
Future prices: Treasury Bonds - $100,000; Pts 32nds of 100%
Delivery month Open High Low Settle Change Open interestDecember 94'28 95'13 94'22 95'05 +0'07 591,944March 96'03 96'03 95'13 95'25 +0'08 120,353June 95'03 95'17 95'03 95'17 +0'08 13,597
a. Use the given data to create a hedge against rising interest rates
b. Assume that interest rates in general increase by 200 basis points. How well did your hedge perform?
c. What is a perfect hedge? Are any real-world hedges perfect? Explain.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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