spot rates (Table 1.2) are quoted on 25 November 2022 (i.e. 21 days before the December 2022 contract expires). - Note that the spot rates are quoted as nominal annual (NAC) rates, while the futures rates are quoted as annual effective rates (AER). - In this module, JIBAR futures can be quoted as a "price' or "index" format (i.e. index of 100 -yield, where the "yield" is a nominal annual rate [i.e. NAC]); or - "yield" format (i.e. by quoting the annual effective rate [AER]). - The JIBAR futures in Table 1.1 below are quoted in "Index" format (i.e. 100 yield). 1.1. Suppose your company intends to borrow R20 million, for 12 months, starting in mid-March 2023. Your bank will only be willing to offer you a rolling 3-month floating rate loan fi.e. Ioan rate calculated every three months on the first day of the loan). So the first interest rate will only be known in March 2023. Your company is worried that interest rates will increase between today and the start of the 12-month loan period (i.e. March 2023). Explain which one of the futures contracts in the table above you should use to hedge the interest rate risk for the first set interest rate in 2023. Explain in detaii, including number of contracts used. (3) 1.2. Suppose you are worried that interest rates will increase any time(s) during the whole loan period (i.e. between 25 Nov 2022 and December 2023). 1.2.1. Explain how you can apply a strip hedge with the futures contracts in the table above to hedge some of this interest rate risk. Explain in detail, including number of contracts used. (3) 1.2.2. Explain how you can apply a stack hedge with the futures contracts in the table above to hedge some of this interest rate risk. Explain in detail, including number of contracts used. (4) 1.3. Suppose you cannot use the JBAR futures above to hedge the interest rate risk (from loan mentioned above) for the 3-month period starting in June 2023 (e.g. due to insufficient trading liquidity in the futures market). Fortunately, you can also negotiate an FRA201xza9 in the OTC market by using the spot rates in Table 1.2 below. Use the spot rates below to calculate the applicable FRAzo1xzan rate. spot rates (Table 1.2) are quoted on 25 November 2022 (i.e. 21 days before the December 2022 contract expires). - Note that the spot rates are quoted as nominal annual (NAC) rates, while the futures rates are quoted as annual effective rates (AER). - In this module, JIBAR futures can be quoted as a "price' or "index" format (i.e. index of 100 -yield, where the "yield" is a nominal annual rate [i.e. NAC]); or - "yield" format (i.e. by quoting the annual effective rate [AER]). - The JIBAR futures in Table 1.1 below are quoted in "Index" format (i.e. 100 yield). 1.1. Suppose your company intends to borrow R20 million, for 12 months, starting in mid-March 2023. Your bank will only be willing to offer you a rolling 3-month floating rate loan fi.e. Ioan rate calculated every three months on the first day of the loan). So the first interest rate will only be known in March 2023. Your company is worried that interest rates will increase between today and the start of the 12-month loan period (i.e. March 2023). Explain which one of the futures contracts in the table above you should use to hedge the interest rate risk for the first set interest rate in 2023. Explain in detaii, including number of contracts used. (3) 1.2. Suppose you are worried that interest rates will increase any time(s) during the whole loan period (i.e. between 25 Nov 2022 and December 2023). 1.2.1. Explain how you can apply a strip hedge with the futures contracts in the table above to hedge some of this interest rate risk. Explain in detail, including number of contracts used. (3) 1.2.2. Explain how you can apply a stack hedge with the futures contracts in the table above to hedge some of this interest rate risk. Explain in detail, including number of contracts used. (4) 1.3. Suppose you cannot use the JBAR futures above to hedge the interest rate risk (from loan mentioned above) for the 3-month period starting in June 2023 (e.g. due to insufficient trading liquidity in the futures market). Fortunately, you can also negotiate an FRA201xza9 in the OTC market by using the spot rates in Table 1.2 below. Use the spot rates below to calculate the applicable FRAzo1xzan rate
