Flashcards
Interest rate hedging
Cards in this deck (9)
- 1how to calculate FRA?principal interest (rf + risk) × principal × n/12
+
FRA Outcome (rf-FRA) x principal × n/12
=
Net Receipt
Effective rate =
Net Receipt/Principal ×12/n - 2how do you calculate an interest rate future?select the first maturity date after the risk starts
borrow = sell = put
...
# contracts = loan$×loan term/ contract $ × contract term
...
Tick value = Contract $ × 0.0001 x Contract term
...
Spot at start of risk -(Expected future rate = spot-future×risk start to maturity/now to maturity)
...
gain on futures market = (expected future - selected future = change × 100 = tick change) × tick value × # contracts
+
cost of borrowing= (spot+credit risk adj.) × loan term x loan $
= NET COST
...
Effective rate = Net Cost/Loan × reversed loan term fraction - 3How to calculate an interest rate future option?select the first maturity date after the risk starts
borrow = sell = put
...
# contracts = loan$×loan term/ contract $ × contract term
...
Tick value = Contract $ × 0.0001 x Contract term
...
Spot at start of risk -(Expected future rate = spot-future×risk start to maturity/now to maturity)
...
gain on futures market = (expected future - exercise price = %change × 100 = tick change) × tick value × # contracts ONLY EXERCISE IF GAIN
+
cost of borrowing= (spot+credit risk adj.) × loan term x loan $
+
Premium × tick value × # contracts
= NET COST
...
Effective rate = Net Cost/Loan × reversed loan term fraction - 4How do you calculate an interest rate collar?Gain on futures market = (expected future - exercise price = %change × 100 = tick change) × tick value × # contracts ONLY EXERCISE IF GAIN, ISSUED WILL BE EXERCISED IF GAIN
+
cost of borrowing= (spot+credit risk adj.) × loan term x loan $
+
Premium bought - Premium issue × tick value × # contracts
= NET COST
...
Effective rate = Net Cost/Loan × reversed loan term fraction - 5what are the basics of setting a long collar?hedge the loan with the put option, SET CAP
write a call option and earn a premium, SET FLOOR - 6What are the basics of a deposit collar?Write a put and earn a premium, SET CAP
Hedge using a call option, SET FLOOR - 7How do you calculate an interest rate swap?calculate saving:
company A fixed rate - company B fixed rate
+/-
company A floating rate - company B floating rate
saving to be split as directed
...
calculate the swap, balancing figure & libor:
company A B
own % %
variable (%) % the swap, always libor
fixed % (B) the swap, balancing
= own rate - saving
...
cost of swap:
loan × own %
+ payment to b, loan x libor
- Receipt from b, loan × swap rate
+ fee split as directed
= NET COST . - 8How do you calculate the interest rate of a forward?year 1 = Spot Yield
year 2 + = Spot yield relevant yr^n
/Spot yield previous yr^n
nb: there is often an adjustment to the rate for the company given in points - 9how to calculate the value of a swap using interest rate forward?calculate the expected interest:
year 1, (spot yield +/- risk adj.) × $ loan = $ Receipt
year 2+, (forward yield +/- risk adj.) × $ loan = $ Receipt
...
at the start of the swap the NPV of recepts variable rate = fixed amount pd to bank,
so if r = fixed amount;
...
($ Receipt - r) × (1+spot yield)^-n + ($ Receipt - r) × (1+spot yield)^-n + ... = 0
...
remove brackets:
$ Receipt × (1+spot yield)^-n - 1r × (1 + spot yield)^-n
simplify by sum $ flows and r flows:
$ Receipt - Xr = 0
so,
$ Receipt/X=r
...
and r / loan =% rate per year, is this lower than fixed?
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- Advanced Financial Management (5. treasury and risk management techniques) Flashcards on Interest rate hedging, created by Denise H on 04/12/2019.
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- Denise H
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