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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