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A corporation plans to issue $10 million of 10-year bonds in three months. At current yields the bonds would have modified duration of eight years.

A corporation plans to issue $10 million of 10-year bonds in three months. At current yields the bonds would have modified duration of eight years. The Treasury bond futures contract is selling at F0 = 100 and has modified duration of six years. How can the firm use this futures contract to hedge the risk surrounding the yield at which it will be able to sell its bonds? Both the bond and the contract are at par value.

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