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Sir as regards the interest rate risk faced by Herd co which of the following statements is correct
a) In exchange for premium Herd co hedge its interest rate risk by buying interest rate options
b) Buying a floor will give Herd co a hedge against interest rate risk increases
c) Herd co can hedge its interest rate risk by buying interest rate futures now in order to sell them at a future date
d) Taking out a variable overdraft will allow Herd co to hedge the interest rate risk through matchingCorrect answer is A. But please can you explain me
Have you not watched the lectures? Because I am simply typing out what I say in the lectures!!!
Buying a floor fixes a minimum rate, which is no use again increases.
Buy futures and selling later hedges against interest rate falls.
Taking out an overdraft simply means paying more interest.Buying options can fix a cap which will protect against increases.
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