1. Mark Fielding-Pritchard
Interest Rate Hedges
Mark Fielding-Pritchard

2. Interest Rate Hedges 1 June, depositing in 5 months So buy December
𝑥 = 19
On 1 June we buy 19 December contracts
On 1 November we will sell
Price
Basis risk 60 ticks
By 1 November basis risk will fall by 5/7, leaving 17

3. b) We want an FRA starting in 5 months, ending in 9 months so 5v9
FRA Deposit rates are 3.45%
Future is which is 3.4%
Examiner has taken into account decline in basis risk, so decline of 43 ticks is a gain, this buying/selling long dated futures and making gains from he narrowing of the spreads is trade practice

4. c) Interest rates fall 0.5%, from 4 to 3.5% FRA Payment to bank
7.1m x 0.05% x 4/12 = £
Lost interest 7.1m x 0.5% x 4/12
11833
Bought Future 9660
Sold – = 9667
Gain 7 x x 19=
Net Loss

5. d) Basis risk may not decline in a straight line
Payments/ receipts will not occur at the end
Fees & deposits are ignored
Basis of calculations may not be directly inked to LIBOR

6. e) Similarities Differences Hedging instruments
Allows fixing rates over periods of time
Can make floating rate loans fixed and vice versa
Can combine with currency
FRA short term, swap medium
FRAs are usually set up as collars to offset costs