How can swaps be used to reduce the risks

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Reference no: EM131367869

1. How can swaps be used to reduce the risks associated with debt contracts?

2. What is the implied interest rate on a Treasury bond ($100,000) futures contract that settled at 100-16? If interest rates increased by 1 percent, what would be the contract's new value?

3. The Zinn Company plans to issue $10,000,000 of 10-year bonds in June to help finance a new research and development laboratory. It is now November, and the current cost of debt to the high-risk biotech company is 11 percent. However, the firm's financial manager is concerned that interest rates will climb even higher in coming months. The following data are available:

Delivery Month (¹)	Open (2)	High (³)	Low (4)	Settle (5)	Change (6)	Open Interest (7)
Dec	94-28	95-13	94-22	95-05	+7	591,944
Mar	96-03	96-03	95-13	95-25	+8	120,353
June	95-03	95-17	95-03	95-17	+8	13,597

a. Use the given data to create a hedge against rising interest rates.

b. Assume that interest rates in general increase by 200 basis points. How well did your hedge perform?

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

Reference no: EM131367869

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