FNDC December 06 Mark Fielding-Pritchard mefielding.com1

FNDC b)  Co will borrow £45m in 5 months time for 2 months  Now is 1 December, rate risk expires on 1 May  Sell futures, June  (45m/0.5m) x 2/3 = 60  On 1 December we sell 60 June futures at  If interest rate is 4%, basis risk is 45 basis points with 7 months to closure  Remaining basis risk at 1 May will be 2/7 x 45 = 13 mefielding.com2

FNDC b) 3.5%4.5% (Additional) saved interest 45m x 2/12 x ½ % 37500(37500) Future MovementSold Buy ( ) Loss 0.82% Sold Buy (95.50 – 0.13)= 9537 Gain 0.18 % (Loss)/ Gain on future Net = £24000(37500) = (24000) mefielding.com3

Options mefielding.com4 Exercise Price 95005% We need 60 June puts June put with an exercise price of 9550 gives us the lowest effective interest rate Premium is % x x 3/12 x 60 = £12375

Options 3.5%4.5% (Additional) saved interest 45m x 2/12 x ½ % 37500(37500) Future MovementSold 9550 Buy ( ) Won’t exercise Sold 9550 Buy (95.50 – 0.13)= 9537 Gain 13 Net gain = (15750) = (40125) mefielding.com5

FNDC  To set up the collar we start with the hedge. FNDC pays Libor plus 125 so Libor must not rise above 4.5%.  Therefore buy Puts at 9550  To construct a floor we sell calls at 4% or 9600 mefielding.com6