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18-6. Hedging The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2018 to help finance a new research and development laboratory. Assume
18-6. Hedging The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2018 to help finance a new research and development laboratory. 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. b. Futures- +$3,580,617; Bond--$2,203,701; Net- +$1,376,916 18-6. Hedging The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2018 to help finance a new research and development laboratory. 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. b. Futures- +$3,580,617; Bond--$2,203,701; Net- +$1,376,916
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