Hedging interest rate risk using t-bond futures
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The Marcus Corporation plans to issue $10,000,000 of 20-year bonds next June. The company's current cost of debt is 12 percent. However, the firm's financial manager is concerned that interest rates will increase in coming months, and has decided to take a short position in U. S. government t-bond futures. The following settle data are available for t-bond futures.
Delivery
Month Settle
(1) (5)
Dec 99-17
Mar 98-01
June 97-12
a. Calculate the current value of the futures position.
b. Calculate the implied interest rate based on the current value of the futures position.
c. Interest rates increase as expected, by 3 percentage points. Calculate the present value of the futures position based on the rate calculated above plus the 3 points.
d. Calculate the gain or loss on the futures position.
e. Calculate the present value of the corporate bonds if rates increase by 3 percentage points.
f. Calculate the gain or loss on the corporate bond position.
g. Calculate the overall net gain or loss.
h. Is the company hedging or speculating? Why? Which is riskier? Why?
Please see attached excel file and calculate in excel if possible.
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Solution Summary
Calculations are made to show the use of t-bond futures to hedge interest rate risk.
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