Interest Rate Futures
Content
Futures Hedging Strategy
Presented by: Gangotri Bajpai U. Akash Gopal Krishan
y
y
y
An Interest Rate Futures is a financial derivative (a futures contract) with an interest-bearing instrument as the underlying asset. An interest rate future is a contract between the buyer and seller agreeing to the future delivery of any interest-bearing asset Interest rate futures are used to hedge against the risk of that interest rates will move in an adverse direction, causing a cost to the company.
INTEREST RATE FUTURES
y y y y y
Richard Myers, President, Peoples Federal Saving Bank (PFSB) Paid out in variation margin on T bills : $1,830,000 Variation margin loss :$ 690,000 Total loss : $2,520,000 Reason for the loss: Market scenario ALM mismatch: short term deposits, long term loans and advances
INTRODUCTION
R&UP Total Asset Cap Ratio
$11,402.00 $13,480.00 $16,605.00 $15,805.00 $555,613.00 $509,378.00 $434,267.00 $350,714.00 2.05% $277.81 2.65% 3.82% 4.51%
Reduction in CAR Lead to liquidity of the bank when goes below 2% Steps taken by the bank to protect
Interest Rate at its Peak
Hedge cost of savings certificate rollover of $400 million y Short position in 90 day Treasury Bill y Fully hedge the short term interest rate exposure
y
HEDGING STRATEGIES
Presented by: Gangotri Bajpai U. Akash Gopal Krishan
y
y
y
An Interest Rate Futures is a financial derivative (a futures contract) with an interest-bearing instrument as the underlying asset. An interest rate future is a contract between the buyer and seller agreeing to the future delivery of any interest-bearing asset Interest rate futures are used to hedge against the risk of that interest rates will move in an adverse direction, causing a cost to the company.
INTEREST RATE FUTURES
y y y y y
Richard Myers, President, Peoples Federal Saving Bank (PFSB) Paid out in variation margin on T bills : $1,830,000 Variation margin loss :$ 690,000 Total loss : $2,520,000 Reason for the loss: Market scenario ALM mismatch: short term deposits, long term loans and advances
INTRODUCTION
R&UP Total Asset Cap Ratio
$11,402.00 $13,480.00 $16,605.00 $15,805.00 $555,613.00 $509,378.00 $434,267.00 $350,714.00 2.05% $277.81 2.65% 3.82% 4.51%
Reduction in CAR Lead to liquidity of the bank when goes below 2% Steps taken by the bank to protect
Interest Rate at its Peak
Hedge cost of savings certificate rollover of $400 million y Short position in 90 day Treasury Bill y Fully hedge the short term interest rate exposure
y
HEDGING STRATEGIES
