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Derivatives and Alternative Investments
Finance & Accounting
Pages 14 (3514 words)
DERIVATIVES AND ALTERNATIVE INVESTMENTS by Student’s name Code+ course name Professor’s name University name City, State Date Question 1 The manager wants to hedge the interest rate risk on bonds to ascertain or dispute this it is necessary to consider why a firm should hedge or not.
First, if management understands about the corporation’s risks better than shareholders, the corporation, not its stakeholders, can hedge. Subsequent, corporation could be capable to hedge at a lower cost. Corporate hedging can be justified if default costs are significant, since it reduces the possibility of default (Johnson, 2010). Lastly, if the corporation encounters progressive taxes, it can decrease tax accountabilities by hedging which steady corporate earnings. To calculate the appropriate number of bonds and equity futures that should be sold the following are considered and done. Bond estimation is a technique used to establish the predictable trading price of a bond. The anticipated trading value is computed by adding the total of the current values of all coupon costs to the current value of the par value (Johnson, 2010). German federal state bonds with a minimum issuing volume of EUR 1 billion. ...
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