USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
In late January 2004, The Union Cosmos Company is considering the sale of $100 million in 10-year bonds that will probably be rated AAA like the firm's other bond issues. The firm is anxious to proceed at today's rate of 10.5 percent. As treasurer, you know that it will take until sometime in April to get the issue registered and sold. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts each representing $100,000.

-Refer to Exhibit 15.1. Explain how you would go about hedging the bond issue?
A) sell 1,000 contracts
B) buy 1,000 contracts
C) sell 100 contracts
D) sell 10,000 contracts
E) buy 10,000 contracts

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
In late January 2004, The Union Cosmos Company is considering the sale of $100 million in 10-year bonds that will probably be rated AAA like the firm's other bond issues. The firm is anxious to proceed at today's rate of 10.5 percent. As treasurer, you know that it will take until sometime in April to get the issue registered and sold. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts each representing $100,000.
 
-Refer to Exhibit 15.1. Explain how you would go about hedging the bond issue?
A) sell 1,000 contracts 
B) buy 1,000 contracts 
C) sell 100 contracts 
D) sell 10,000 contracts 
E) buy 10,000 contracts

Quizplus · Accepted Answer

To hedge a bond issue, you would typically sell futures contracts to protect against a rise in interest rates, which would decrease the value of the bonds. Selling 1,000 contracts would likely match the size of the bond issue being hedged.