Page 231 - AFM Integrated Workbook STUDENT S18-J19

Hedging interest rate risk

4.5 Exam shortcut – the ‘lock-in’ rate

The calculation of the likely financial result of the futures hedge was a
lengthy calculation, and it also relied upon being able to estimate the
market rate of interest on the transaction date.

There is a much simpler way of estimating the likely financial result of
the futures hedge, by just calculating the overall 'lock-in rate' for the
hedge. For interest rate futures:

Lock-in rate

= 100 – (current futures price + unexpired basis on the transaction date)

Illustrations and further practice

Now try TYU 4 in Chapter 11

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