Assume you are the Treasurer for the Johnson Pharmaceutical Company and in late July 2004, the company is considering the sale of $500 million in 20-year debentures that will most likely be rated the same as the firm's other debt issues. The firm would like to proceed at the current rate of 8.5%, but you know that it will probably take until November to bring the issue to market. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts which each represent $100,000.

			Case 1	Case 2
Current Value July 2004
		Bond Rate	8.5%	8.5%
		Dec. 2004 Treasury Bonds	87.75	87.75
Estimated Values Nov. 2004
		Bond Rate	9.5%	7.5%
		Dec. 2004 Treasury Bonds	85.60	91.65

How you would go about hedging the bond issue? Buy or sell how many contracts?

What is the dollar gain or loss assuming that future conditions described in Case 1 actually occur? Discuss.

What is the dollar gain or loss assuming that future conditions described in Case 2 actually occur? Discuss.