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On July 1, a portfolio manager holds $1 million face value of Treasury bonds, the 11 l/4s maturing in about 29 years. The price is 107 14/32. The bond will need to be sold on August 30. The manager is concerned about rising interest rates and believes that a hedge would be appropriate. The September T-bond futures price is 77 15/32. The price sensitivity hedge ratio suggests that the firm should use 13 contracts,
a. What transaction should the firm make on July 1?
b. On August 30, the bond was selling for 101 12/32 and the futures price was 77 5/32. Determine the outcome of the hedge?
You have just opened a retirement account and deposit $4,100 a year in the account. If you want to retire in 40 years and the account earns 8 percent interest, how much will he have in your account when you finally retire?
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Firms U and L each have the same amount of assets, and both have a basic earning power ratio of 20%. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L's debt has a before-tax cost o..
Assume you import 1 million Euro of computer from Europe from France and you have to make the payment in Euro and pay in September. To hedge against rate uncertainty, you can buy a September option. If you buy the option, on the maturity date, the sp..
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