L5%20Hedging%20IRR - HEDGING INTEREST RATE RISK FUTURES...

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