Page 227 - AFM Integrated Workbook STUDENT S18-J19

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).

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