Futures Hedging Strategy

Presented by:
Gangotri Bajpai
U. Akash
Gopal Krishan
An Interest Rate Futures is a financial
derivative (a futures contract) with an interest-
bearing instrument as the underlying asset.
An interest rate future is a contract between
the buyer and seller agreeing to the future
delivery of any interest-bearing asset
Interest rate futures are used to hedge against
the risk of that interest rates will move in an
adverse direction, causing a cost to the
company.

INTEREST RATE FUTURES

Richard Myers, President, Peoples Federal
Saving Bank (PFSB)
Paid out in variation margin on T bills :
$1,830,000
Variation margin loss : $ 690,000
Total loss : $2,520,000
Reason for the loss:
Market scenario
ALM mismatch: short term deposits, long
term loans and advances

INTRODUCTION
R&UP $11,402.00 $13,480.00 $16,605.00 $15,805.00
Total Asset $555,613.00 $509,378.00 $434,267.00 $350,714.00
Cap Ratio 2.05% 2.65% 3.82% 4.51%
  $277.81     

Reduction in CAR
Lead to liquidity of the bank when goes
below 2%
Steps taken by the bank to protect
Interest Rate at its Peak
Hedge cost of savings certificate rollover
of $400 million
Short position in 90 day Treasury Bill
Fully hedge the short term interest rate
exposure

HEDGING STRATEGIES