Company C plans to issue $20 million in bonds, three months from now. The bonds will have a maturity of 10 years, and an annual coupon rate of 9%, paid semi-annually. It is expected the bonds will be issued at par. However, there is considerable uncertainty as to the actual required return on these bonds three months from now. For this reason, Company C has decided to hedge the risk over the next three months using T-Bond futures contracts.

The futures contracts are on an 20-year Treasury bond. The annual coupon rate is 6%, paid semi-annually. The Treasury bond is also trading at par.

Company C should hedge by

Group of answer choices

A) Not taking any futures position.

B) Selling futures contracts (taking a short futures position).

C) Buying futures contracts (taking a long futures position).

D) Combing long and short futures positions.

Company C plans to issue $20 million in bonds, three months from now. The bonds will have a maturity of 10 years, and an annual coupon rate of 9%, paid semi-annually. It is expected the bonds will be issued at par. However, there is considerable uncertainty as to the actual required return on these bonds three months from now. For this reason, Company C has decided to hedge the risk over the next three months using T-Bond futures contracts.

The futures contracts are on an 20-year Treasury bond. The annual coupon rate is 6%, paid semi-annually. The Treasury bond is also trading at par.

If the required return on the Treasury bond will change by 0.5% for every 1% change in the required return for Company Cs bonds then the hedge ratio is closest to

Group of answer choices

A) 0.98

B) 1.12

C) 0.86

D) 0.93