Page 235 - AFM Integrated Workbook STUDENT S18-J19

Hedging interest rate risk

Choose 96.00 (cheapest overall cost).

Contact the exchange: We need to buy 40 September put options at a strike
price of 96.00

Result of hedge

On 1 September – assume interest rate is 5% and futures price is 95.10:

Transaction: $

Interest $20m × 5%× 6/12 (500,000)
Futures/options mkt:

31 May – Put/Sell 96.00
1 Sept – Buy 95.10

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Gain (so EXERCISE!) 0.90%

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(× 40 contracts × $1m × 3/12) 90,000

Premium 0.38% × 40 contracts × $1m × 3/12 (38,000)
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Net (448,000)
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Illustrations and further practice

Now try TYU 5 and TYU 6 in Chapter 11

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