HEDGING INTEREST RATE RISK: FUTURES, FORWARDS AND SWAPS KIMEP MANAGEMENT OF FINANCIAL INSTITUTIONS
AGENDA : HEDGING INTEREST RATE RISK SPOT, FORWARDS, FUTURES AND HEDGING STRATEGIES; MICROHEDGING WITH FORWARDS MACROHEDGING WITH FUTURES INTEREST RATE SWAPS Plain Vanila interest Rate Swaps Macrohedging with Swaps
What is a derivative?
SPOT and FORWARDS SPOT contract is an agreement between a buyer and seller at time = 0 when the seller of the asset agrees to deliver it immediately and the buyer of the asset agrees to pay for it immediately. FORWARD contract is a contractual agreement between a buyer and a seller to exchange or deliver an asset for cash at an agreed date in future and on an agreed quantity and price set at time 0. 0 1 3 2 Price set and bond delivered at time 0 0 1 2 3 Price set at time 0 Bond delivered at time 3 at price and quantity agreed at time 0
Specification of the 10 year Treasury note futures traded at CME Underlying Unit One U.S. Treasury note having a face value at maturity of $100,000. Deliverable Grades U.S. Treasury notes with a remaining term to maturity of at least six and a half years, but not more than 10 years , from the first day of the delivery month. Price Quote Points ($1,000) and halves of 1/32 of a point . For example, 126-16 represents 126 16/32 and 126-165 represents 126 16.5/32. Par is on the basis of 100 points. Tick Size (minimum fluctuation) One-half of one thirty-second (1/32) of one point ($15.625, rounded up to the nearest cent per contract Contract Months The first five consecutive contracts in the March, June, September, and December quarterly cycle. Last Trading Day
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