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RGI Co wishes to invest $12 million in 6 months’ time for two months and
considering the following hedging strategies
(1) A 6 – 8 FRA quoted at 4%.
(2) An IRG at 4% for a premium of 0.1%
Required:
Determine the costs if in six months’ time the market rate is: (a) 5%
(b) 3% and comment.As per the solution
IRG at 4%
Market rate 5% – lapse 3% – exercise.But on what basis it is decided which one to exercise and lapse
Given that they are depositing money, the IRG fixes a minimum interest rate of 4%.
So if the actual interest is more than 4% then they get the actual interest. If the interest rate is less than 4% then they get 4%.
I do suggest that you watch my free lectures on interest rate risk management, because I explain all this in detail, with examples.
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