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The Zinn Company plans to issue $19,000,000 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 125145. It is now early June, and the current cost of debt to the high-risk biotech company is 12%. However, the firm's financial manager is concerned that interest rates will climb even higher in coming months.

1. Create a hedge against rising interest rates. Do not round intermediate calculations. Round your answer to the nearest dollar.

   To hedge against rising interest rates, the firm should -Select-buysellItem 1 future contacts (each for $100,000 in 10-year, 6% semiannual coupon Treasury notes).

   The value of Zinns futures is $ . Thus, the firm -Select-hashas not Item 4 hedged against rising interest rates.

2. Assume that interest rates generally increase by 200 basis points. How well did your hedge perform? (Note that the future contracts are on 10-year, 6% semiannual coupon Treasury notes.) Do not round intermediate calculations. Round your answer to the nearest dollar. The loss, if any, should be indicated by a minus sign.

   On net, the firm's gain/loss is $ .

3. What is a perfect hedge? Are most real-world hedges perfect?

   In a perfect hedge, the gains on futures contracts -Select-exactly offsetare lower than are higher than Item 6 the losses due to rising interest rates. It is -Select-quite easyvirtually impossible Item 7 to create a perfect hedge, since in most cases the underlying asset -Select-isis not Item 8 identical to the futures asset.