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Are the following interest hedging instruments ST or LT:
FRAs – ST
IRGs – ST
STIRs – ST
Interest Rate Options – ST
Interest Rate Swaps – LTCorrect?
Example:
It is now end May 20×4. The company will need to borrow 2 million at end of September 20×4 for 6 months with September futures
My understanding is that the company’s hedging period is from May to Sept (4 months).
But the loan is for 6 months. So how does an interest hedge of 4 months cover up for an interest period of 6 months.So, if you were hedging using interest rate futures, it would be the four month future rate you would use, but you would have to buy/sell enough futures to cover 6 months’ interest on the amount borrowed.
So, if interest rates are 5% and the company fears they will rise to say 7%, then it would sell futures now at around 95 (ie 100 – 5) and buy them in four months at 93 (ie 100 – 7). There would be enough futures contracts to make a profit enough to compensate for the additional interest of 2m x 2% x 6/12
QUESTION:
An interest rate derivative characterised by being available for any amount, redeemable on any date, payment on settlement and traded over the counter, is called?
A. AN INTEREST RATE SWAP
B. A FORWARD RATE AGREEMENT
C. AN INTEREST RATE FUTURE
D. AN INTEREST RATE OPTIONANSWER : B
My Question:
What is the difference between the redeemable date and settlement date?
Settlement date = start of the FRA contract.
Redeemable date = end of the FRA contractSo an FRA described as 6% 3^9 would have 3 as the settlement date, 9 as the redeemable date.
Is it the same for currency futures? when you take out a contract (settlement date) and when the contract closes (redeemable date)
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