interest rate futures

Interest rate futures- KLIBOR futures KLIBOR ( Kuala Lumpur Interbank Offer Rate) is simply the interest rate charged (or received)on short term funds placed in the interbank market. The KLIBOR is an offer rate at which participants in the interbank market are willing to lend funds to other approved institutions for various tenors- such as one, two, three, six, nine and twelve months. Many banks ude the KLIBOR rate as a benchmark for pricing loans to corporations to corporations because the rate is objectively arrived at through the process of borrowing and lending among a large number or market participants. KLIBOR futures contract is based on a 3-month interbank deposit in the Kuala Lumpur wholesale market having a principal value of RM1 million. The futures price is quoted as an index, calculated as 100 minus the interest rate per annum. For example, a deposit quoted in the cash market at a rate of 7.5% would have an index price of 92.50 in the futures market. This means that when interest rate fall in the cash market, a long futures position increases in value. Put simply, as interest rates rise, the price of futures falls and vice versa. Minimum price fluctuation is 0.01% ( 1 tick) which is equivalent to RM25. If you buy a KLIBOR futures contract at 93.75, you have entered into an agreement to invest RM1 million at a rate of 6.25% p.a for a term of three months beginning on the date of expiry of the futures contract. Conversely, if you sell a KLIBOR futures contract at 92.50, you have entered into an agreement to borrow RM 1 million at a rate of 7.50% p.a for a term of three months beginning on the date of expiry of the futures contract. Example: Company A intends to invest RM20 million in the interbank market in three months’ time. The company can use the futures market to set a ﬁrm rate, protecting itself from an interest-rate down turn. Assuming it is now March, the current price of June KLIBOR futures is 90.94. It uses the June contract because it coincides with the timing of its anticipated physical transaction. Three months later, the company makes the actual investment in cash market. Interest rate is at 7.5%.

Upload: trevorsum67890

Post on 17-Aug-2015

12 views

Category:

Documents

3 download

Report

Download

Embed Size (px):

TRANSCRIPT

Interest rate futures- KLIBOR futures

KLIBOR ( Kuala Lumpur Interbank Offer Rate) is simply the interest rate charged (or received)on short term funds placed in the interbank market. The KLIBOR is an offer rate at which participants in the interbank market are willing to lend funds to other approved institutions for various tenors- such as one, two, three, six, nine and twelve months. Many banks ude the KLIBOR rate as a benchmark for pricing loans to corporations to corporations because the rate is objectively arrived at through the process of borrowing and lending among a large number or market participants.

KLIBOR futures contract is based on a 3-month interbank deposit in the Kuala Lumpur wholesale market having a principal value of RM1 million. The futures price is quoted as an index, calculated as 100 minus the interest rate per annum. For example, a deposit quoted in the cash market at a rate of 7.5% would have an index price of 92.50 in the futures market. This means that when interest rate fall in the cash market, a long futures position increases in value. Put simply, as interest rates rise, the price of futures falls and vice versa. Minimum price fluctuation is 0.01% ( 1 tick) which is equivalent to RM25.

If you buy a KLIBOR futures contract at 93.75, you have entered into an agreement to invest RM1 million at a rate of 6.25% p.a for a term of three months beginning on the date of expiry of the futures contract. Conversely, if you sell a KLIBOR futures contract at 92.50, you have entered into an agreement to borrow RM 1 million at a rate of 7.50% p.a for a term of three months beginning on the date of expiry of the futures contract.

Example:

Company A intends to invest RM20 million in the interbank market in three months’ time. The company can use the futures market to set a firm rate, protecting itself from an interest-rate down turn. Assuming it is now March, the current price of June KLIBOR futures is 90.94. It uses the June contract because it coincides with the timing of its anticipated physical transaction. Three months later, the company makes the actual investment in cash market. Interest rate is at 7.5%.

Based on the information given, outline your hedging strategy.