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Hi tutor,
I am practising on Options and Futures hedging, only one thing make me confused.
For instance, a company needs a loan of $1m in 3 months time for the period of 2 months. The company is considering using options to hedge against the risk of interest rate rise. Assuming the contracts mature at the end of month. Given March, June, December tables of the prices.
Today is 15th December. So, I am confused what is the contract date? Mach or June contract?
To me, I think it will be June contract, because I assume that the contract will not start to 15th March, lasts for 2 months until 15/5. So picking June as the date contract. But actually it is confusing quetion, because in 3 months time, we do not know what exact date of start?
However the answer is March contract. It means the contract starts today, on 15/12.
Please explain me why?
Thanks a lot.
Sasha
To use futures we start the deal today and close it on the day the loan starts – in that was we hedge against interest rate changes between now and the date the loan starts.
Since the loan starts on 15 March, we use the futures that finish the first after that date, so it is March futures. They can be bought and sold at any time up to the 31st March – the exact date does not matter.
I do suggest that you watch my free lectures on interest rate risk management because they cover all of this in detail.
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