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Create hedge against rising interest rates

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Reference no: EM131980875

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 seminally. 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:

(Formula in Excel) The June delivery month should be used: The company plans to issue bonds in June so he contracts needs to be for June Delivery.

Futures Price: Treasury Bonds - $100,000; Pts. 32nds of 100%

Delivery Month           Open      High       Low         Settle       Change           Open Interest

     (1)                           (2)            (3)            (4)            (5)               (6)                      (7)

Dec                       94'28              95'13       94'22        95'05           +0'07                  591,944

Mar                      96'03               96'03        95'13        95'25           +0'08                 120,353

June                     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 hedge perfect? Explain

Reference no: EM131980875

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