It is January, and Tennessee Sunshine is considering issuing $5 million in bonds in June to raisecapital for an expansion. Currently, the firm canissue 20-year bonds with a 7% coupon (withinterest paid semiannually), but interest rates areon the rise and Stooksbury is concerned that longterm interest rates might rise by as much as 1%before June. You looked online and found thatJune T-bond futures are trading at 111’250. Whatare the risks of not hedging, and how might TShedge this exposure? In your analysis, considerwhat would happen if interest rates all increasedby 1%.
Macrohedging
Hedging or hedge accounting is a risk-mitigation technique used to protect the current financial position from potential losses. Hedging is often confused with speculating. The major difference between the two is that hedging does not involve guessing, whereas speculation is based on guessing the direction of movement of the underlying asset to book profits.
Finance Mathematics
The area of applied mathematics known as mathematical finance, also known as quantitative finance or financial mathematics is concerned with the mathematical modeling of financial markets. The application of mathematical methods to financial problems is known as financial mathematics. A financial market is a place where people can exchange low-cost financial securities and derivatives. Stocks and bonds, raw materials, and precious metals, both of which are regarded as commodities in the stock markets, are examples of securities. It uses probability, statistics, stochastic processes, and economic theory as methods.
It is January, and Tennessee Sunshine is considering issuing $5 million in bonds in June to raise
capital for an expansion. Currently, the firm can
issue 20-year bonds with a 7% coupon (with
interest paid semiannually), but interest rates are
on the rise and Stooksbury is concerned that longterm interest rates might rise by as much as 1%
before June. You looked online and found that
June T-bond futures are trading at 111’250. What
are the risks of not hedging, and how might TS
hedge this exposure? In your analysis, consider
what would happen if interest rates all increased
by 1%.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
