FINANCIAL RISK MANAGRMENT

Protecting Interest Income/Revenue

From the banker's 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.

QUESTION 1: 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? (5 marks)

GIVE STEP BY STEP EXPLANATION.

QUESTION 2: Interest Rate Swap

Suppose a borrower, Syarikat ABC, has a 5-year, RM 10 million loan from Maybank. Maybank charges an interest based on 6-month KLIBOR + 2% payable semi-annually. The firm's funding costs will increase as 6-month KLIBOR rises. How can the firm hedge? (5 marks)