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Summary
Chapter 23 Futures and Forward
Dosen:
Farida Ariyani Nurti Wijayanti, SE, MM, CWM
In this chapter, we look at the role futures and forward contracts play in managing
an FI’s interest rate, FX and credit risk exposures as well as their role in hedging natural
catastrophes. We start with a comparison of forward and futures contract to spot
contract. We then examine how forwards and futures can be used to hedge interest rate,
FX risk, credit risk, and catastrophe risk.
0 1 2 3 Month
0 1 2 3 Month
0 1 2 3 Month
Buyer and seller enter futures Buyer pays the futures price quoted at
contract at time 0 future contract the end of month 3. Seller delivers bond
III. Forward Contract and Hedging Interest Rate Risk
ΔP ΔR
= −D ×
P 1+ R
Where :
where :
ΔE = Change in an FI’s net worth
DA = Duration of its asset portfolio
DL = Duration of its liability portfolio
k = Ratio of an FI’s liabilities to asset (L/A)
A = Size of an FI’s asset portfolio
ΔR
= Shock to interest rates
1+ R
ΔF ΔR
Δ = − Dr
F 1+ R
where :
ΔF = Change in dollar value of futures contracts
F = Dollar value of the initial futures contracts
Dr = Duration of the bond to be delivered against the futures contracts such as a
20-year, 8 percent coupon T-bond
ΔR = Expected shock to interest rates
1+R = 1 plus the current level of interest rates
V. Hedging Credit Risk with Futures and Forward