The Zinn Company plans to issue $20,000,000 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 125–145. It is now early June, and the current
cost of debt to the high-risk biotech company is 11%. However, the
firm’s financial manager is concerned that interest rates will
climb even higher in coming months.
a. Create a hedge against rising interest rates.
b. What is a perfect hedge? Are most real-world hedges perfect? Explain.
a. Create a hedge against rising interest rates.
b. What is a perfect hedge? Are most real-world hedges perfect? Explain.
