Page 181 - Microsoft Word - 00 P1 IW Prelims.docx

Hedging interest rate risk

4.2 Futures hedging calculations

1 Now – set up the hedge

– Buy or sell futures? Borrow = sell, deposit = buy

– How many contracts? Look at contract size AND duration. May
need to round.

– Which expiry date? First contract to expire after transaction date

2 Contact the exchange and pay the initial margin.

3 Future transaction date – financial result is the total of:

– the value of the transaction using the spot rate on the transaction

date, adjusted for:

 profit or loss in the futures market (found by closing out the
futures contracts).

Illustrations and further practice

Now try TYU 3 in Chapter 11

169