How to set the hedging

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It's February, Beta Co. will issue $1 million in bonds in August. Beta is worried interest rates will rise between now and then. Current interest rates are 7% for the 25 year issue. But Beta fears rates might rise by 1% by June. June T-Bond futures are priced at 111-20.

Problem 1: Without hedging, what happens if interest rates increase 1%, i.e. at a yield of 8%. How much will the $1 million worth of 25 year 7% semi-annual coupon bonds be worth?

Problem 2: How to set the hedging, and what is the effectiveness of the hedge. Please demonstrate with calculations.

Reference no: EM132964950

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