1.

a. Suppose a borrower, Syarikat EFG, has a 5-year, $ 10 million loan from Bank of America Corp.. Bank of America Corp. charges an interest based on 6-month KLIBOR + 2% payable semi-annually. The firms funding costs will increase as 6-month KLIBOR rises.

How can the firm hedge?

b. From the bankers point of view, when the banker quotes a floating interest, in doing

so, the banker is passing on the interest rate risk to the borrower.

What if the banker has to quote a fixed interest rate but his cost of funds are floating?

In this case, the customer/borrower faces no risk but the banker does.

Example: As a Credit Officer bank you have agreed to provide a customer with a fixed

rate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12%

annual interest rate.

The following quotes are available in the market.

3-month KLIBOR = 9 %

3-month KLIBOR futures = 90.0 (matures in 90 days)

How would you protect yourself from a rise interest rates?