Question
HEDGINGThe Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2021 to help finance a new research and development laboratory. Assume that interest
HEDGINGThe Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2021 to help finance a new research and development laboratory. Assume that interest rate futures maturing in March 2021 are selling for 125145. It is now early June 2020, and the current cost of debt to the high-risk biotech company is 11%. However, the firms financial manager is concerned that interest rates will climb even higher in coming months.
Create a hedge against rising interest rates.
Assume that interest rates generally increase by 200 basis points. How well did your hedge perform?
What is a perfect hedge? Are most real-world hedges perfect? Explain.
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