In Late January 2011,Starlight Corporation Is Considering the Sale of $50

question 42

Multiple Choice

In late January 2011,Starlight Corporation is considering the sale of $50 million in 10-year debentures rated AAA.The issue will most likely be registered and sold some time in April.Therefore,Starlight Corporation desires to hedge the pending issue using Treasury bond futures contracts each representing $100,000.Explain how you would go about hedging the bond issue?

• A) Sell 500 contracts
• B) Buy 500 contracts
• C) Sell 50 contracts
• D) Buy 50 contracts
• E) None of the above

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Definitions:

Liability

An obligation a company owes to others, such as loans, accounts payable, or mortgages, which must be settled over time through the transfer of economic benefits.

Future Outflow

Projected cash payments or disbursements that a business expects to incur as a result of current operations or future activities.

Resources

Resources are materials, energy, services, staff, or other assets that are utilized to produce goods and services, effectively supporting business operations.

External Users

Individuals or entities outside a company, such as investors, creditors, regulators, and customers, who use the company's financial information to make decisions.