ABC Ltd. is planning to borrow a sum of ₹100 crore after 3 months. To hedge itself against the risk of increase in 91-days interest rate (which is currently 5.25%), the Company decided to trade in 91-Day Government of In

CS Professional · Capital Commodity and Money Market · PYQS · December 2021
ABC Ltd. is planning to borrow a sum of ₹100 crore after 3 months. To hedge itself against the risk of increase in 91-days interest rate (which is currently 5.25%), the Company decided to trade in 91-Day Government of India (GOI) Treasury Bill Future which is currently available at ₹95. The specification relating to these Future Contract are as follows: Unit of Trading Face value ₹2,00,000 Underlying 91-Day GOI Treasury Bill Contract Size ₹2,00,000 Settlement At Weighted Average Discount Yield obtained from weekly auction of 91-day T-Bill conducted by RBI on the day of expiry. You are required to: (i) State the position to be taken by ABC Ltd. in the Future Market to hedge itself against interest rate risk on the loan to be taken with reasons thereon.

Answer & Explanation:

ABC Ltd. has to borrow funds after 3 Months. Interest rates may change after 3 months. In order to protect itself from the fluctuations of interest rate the company has to buy interest future in any shape. In case there is an increase in interest rate at the time of borrowing, it shall be compensated by selling of interest future which it has purchased at lower rate earlier. Same is the situation Vice-versa.

Topics: Interest Rate Futures

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