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sir,
is these concepts are r8,Interest rate hedging >> its a binding contract,has close out date|
Interest rate guarantees >> its not a binding contract ,so no close out date,allow the option lapse if its favorable
Interest rate future >>> its a binding contract,has close out date
Options>> its not a binding contract, let it lapse when favorable ,it has no close out date
You are correct with regard to interest rate guarantees and interest rate options – it is our choice whether or not to exercise the right.
With regard to futures, it is binding in the sense that if you have bought futures then you must sell them at some future date (and if you have sold futures then you must buy them on some future date). There is a date by which you must complete the deal (e.g. for March futures you must complete the deal by the last day of March), but you can complete on any day up to that final date.
Futures, IRG’s and traded options are all examples of hedging (hedging is not some ‘extra’ method). And don’t forget that there is also the possibility of using a ‘forward rate guarantee’ where the interest rate is fixed (and is binding).
(Also appreciate that you cannot be asked any calculations on interest rate risk in F9. That does not happen until P4)
The lectures on interest rate risk will help you.
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