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higher interest expense can create an operating loss Potential lenders are concerned about falling interest rate. Potential borrowers are concerned about the rising interest rate. rate risk in the financial market can be reduce.. 2. lower interest revenue can contribute a lower operating profit Interest 1. In KLIBOR futures market. if not eliminate through.. Buying Hedge Selling Hedge .
. Requires to buy KLIBOR futures because they expect the price to increase in the future or interest rate is expected to fall. Anticipation of falling interest rates will undertake a buying hedge. Buy today at lower price and hopes to sell futures at a higher price.
establish your hedging strategy by showing your effective interest rate(EIR) if the cash rate trades at 3. As a treasurer of a large insurance company.5.1 in the BMDM.8% and December futures at 96.5% per annum while December futures is trading at 95. . in which 3 month KLIBOR is quoting at 4. Today is October. you expect an excess fund of RM200 million for 3 month in December to de deposited in the KLIBOR market. In anticipation for falling interest rates.
Future Position Future Profit= [SP-BP] x 100 x Contract size x Minimum contract price * multiplied by 100 to derive at basis point Cash Position Interest Revenue= Principal x Rate x Time Net Effect = Future Profit + Cash Position EIR = Total Interest Revenue Principal x Time .
8% without hedging. The treasurer receives an effective interest rate (EIR) of 5. Lets say.8%. instead of 3. interest rate has unexpectedly risen to 5% at maturity date… . Futures profit can be use to compensate expected losses in revenue as a result of falling interest rate to 3.2% with hedging.
000 Net Effect = RM2.000) Interest Revenue = RM2.9% that help to avoid and adverse declines in interest rates between Oct and Dec. by hedging.000 EIR = 4. Future Loss = (RM50. However. he has in fact pre-determined his lending rate at 4.9% If he received RM200 mil in Oct. it can be deposited at a rate of 4.500.5%. .450.
Hedging strategy assure him equivalent rate of at least 4.9% or better when interest rate falls. .
Paul. Paul is however worried about the interest exposure. Assuming the following quotations are available now: . Mr. That amount will have to be raised in the interbank market. the Treasurer of Worldwide Finance Company has just determined that there will be a RM180 million shortage of fund for the company three months from now. Worldwide’s cost of fund is normally the KLIBOR rate. Mr.
0% 93.00 .00 92.1-month KLIBOR 3-month KLIBOR Spot-month KLIBOR futures 3-month KLIBOR futures 6.8% 7.
analyze the hedge and show that by using your strategy the intended interest rate has been locked-in (effective interest rate). 3 months later and that the spot and futures market converge. Assuming the spot 3-month KLIBOR is higher by 1. .3%.
Assuming the spot 3-month KLIBOR is higher by 1. .3%. 3 months later and that the spot and futures market converge. analyze the hedge and show that by using your strategy the intended interest rate has been locked-in (effective interest rate).
Net Effect = Future profit + Interest revenue 4. EIR = Total interest revenue PxT .3.