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Implied Contract document sample

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```							d7ee12bb-c975-49fd-981d-66ebaa72e4e4.xls                                                       Ch 24-04 Build a Model

Ch 24-04 Build a Model                                                                              3/7/2001

Chapter 24. Partial Model for Ch 25-04 Build a Model
Note: Fill in the yellow cells with the appropriate formulas

Problem 24-4. Use the information and data from Problem 24-2

Problem Inputs:
Size of planned debt offering =                               \$10,000,000
Anticipated rate on debt offering =                                  11%
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 \$10
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 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?

Change in interest rate on debt offering (basis points) =                                  300

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 =

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.

Michael C. Ehrhardt                                     Page 1                                                  4/8/2011
d7ee12bb-c975-49fd-981d-66ebaa72e4e4.xls                                      Ch 24-04 Build a Model

Dollar    Dollar change
change in    in value of
Change in    cost/savings    futures    Total dollar value
rate         of issue     position     change of hedge
Base 300
-300
-200
-100
0
100
200
300

Michael C. Ehrhardt                                 Page 2                                 4/8/2011

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