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Good day sir,
I must admit i have difficulties understanding interest rate risk in spite of having follow the lecture. I find my self stuck with Q2 of march/june 2016 sample questions.
Unfortunately i can not type the question because its too long. I know you can easily find the question paper. Help explain how I can go about answering question –
2a. Evaluate the risk faced by Plam Co on its peso-dominated interest payment in six months’ time and advise how this risk might be hedged.Thank you sir for helping me to pass F9
Part (a) of the question is nothing to do with interest rate risk!
It is referring to the interest that will be payable in 6 months time, which is a fixed amount in pesos. The risk is the risk due to the peso/$ exchange rate changing in six months time.
This risk can be hedged using either forward rates or money market hedging – both of which I go through in detail in my lectures.
You cannot be asked calculations on interest rate risk. Part (b) is about interest rate risk, but does not require any calculations.
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