- Join over 1.2 million students every month
- Accelerate your learning by 29%
- Unlimited access for just £4.99 per month
Capital market practice questions. Question 1: Explain how STIR futures can be used to hedge the interest rate reset risk in the FRNs.
- Essay length: 2344 words
- Submitted: 21/05/2012
The first 200 words of this essay...
Question 1: Explain how STIR futures can be used to hedge the interest rate reset risk in the FRNs.
As scenario, one of the concerns that the company has to face is the steady rise in short-term interest rates over the next three years. To hedge against rates rising, the company can sell future contracts as a STIR futures tool. The future to use can be the three-month interest rate future.
For example, the company can use LIFFE three - month sterling interest rate futures contract (ST3) as STIR futures tool.
The STIR futures Contract Specification:
Name of the contract
LIFFE three-month sterling interest rate
futures contract (ST3)
Unit of trading
March, June, September, December, and two serial months, such that 26 delivery months are available for trading, with the nearest three delivery months being consecutive calendar months.
Last trading day
11:00, third Wednesday of the delivery month
100.00 minus rate of interest (%)
0.01 % on annual basis
£ 12.5 (Tick value = 500000×0.0001×3/12 = £ 12.5)
Specifically, the company should sell
Found what you're looking for?
- Start learning 29% faster today
- Over 150,000 essays available
- Just £4.99 a month
Not the one? We have 100's more
Finance (view all)
- Financial Management Essay. the importance of capital struct...
- Universal Banking
- "The process of absorption costing (also known as overh...
- Ciba Case Analysis
- Market Efficiency
""Joanne Barratt. Nursing. University Student.
""Chris Mckellar. Media Studies, IT, English. A Level Student.