Risk edging – interest

This topic has 3 replies, 2 voices, and was last updated 5 years ago by John Moffat.

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January 18, 2021 at 5:33 pm #606977
alextrieste
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In past exam papers and revisions we are usually asked to edge the interest risk with options or futures. Usually this is for periods <1 year. In the last exam session we had a period of 18 months (if I am not mistaken). Can you please advise on the correct approach to take even for the calculation of contracts required?

Thanks in advance,

Alex
January 19, 2021 at 6:13 am #607084
John Moffat
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The ‘rule’ is the same regardless of the length of the loan.

The number of contracts is the amount involved x (length of loan in months / 3) divided by the contract size. I explain the reasons for this in my free lectures.
January 20, 2021 at 11:51 am #607274
alextrieste
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Thank you John. so let’s say that we have

contract size $100,000
amount $50,000,000
length of loan 18 mths

$50,000,000 * (18/3) / $100,000

Thanks, I panicked and I didn’t know how to solve this even though I knew the rule
January 20, 2021 at 2:19 pm #607299
John Moffat
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On what you have typed, the number of contracts would be correct.

As to how to solve it, I do explain in my lectures.
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