Futures price: Treasury Bonds- $100,000; pts- 32nds of 100

Delivery mo Open High Low Settle Change Open Interest

December 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 data given to create a hedge against rising interest rates.

b. Assume that interest rates in general increase by 200 basis points.

Use the data from the above problem, but slightly different:

Problem Inputs:

Size of planned debt offering = $20,000,000

Anticipated rate on debt offering = 10%

Maturity of planned debt offering = 10

Number of months until debt offering = 7

Settle price on futures contract (% of par) = 95.53125%

Maturity of bond underlying futures contract = 20

Coupon rate on bond underlying futures contract = 6%

Size of futures contract (dollars) = $100,000

a. Create a hedge with the futures contract for Zinn Company's planned June debt offering of $20 million. What is the implied yield on the bond underlying the future's contract?

Number of contracts needed for hedge =

Value of contracts in hedge =

Implied semi-annual yield =

Implied annual yield =

b. Suppose interest rates fall by 200 basis points. What is the dollar savings from issuing the debt at the new interest rate? What is the dollar change in value of the futures position? What is the total dollar value change of the hedged position?

Change in interest rate on debt offering (basis points) = -200

New interest rate on debt =

Value of issuing at new rate interest =

Dollar value savings or cost from issuing debt at the new rate =

New yield on futures contract =

Value of futures contract at new yield =

Dollar change in value of the futures position =

Total dollar value change of hedge =

a. Create a hedge with the futures contract for Zinn Company’s planned June debt offering of $10 million. What is the implied yield on the bond underlying the future’s contract?

b. Suppose interest rates fall by 300 basis points. What is the dollar savings from issuing the debt at the new interest rate? What is the dollar change in value of the futures position? What is the total dollar value change of the hedged position?

c. Create a graph showing the effectiveness of the hedge if the change in interest rates, in basis points, is: -300, -200, -100, 0, 100, 200, or 300. Show the dollar cost (or savings) from issuing the debt at the new interest rates, the dollar change in value of the futures position, and the total dollar value change.

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