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: (ii) Calculate the Number of Future Contracts (rounded off on lower side) needs to be traded to hedge the risk on the loan to be taken. Also calculate the amount of loan left exposed to risk even after taking Future Contracts.

Answer & Explanation:

No. of Future Contract needed to Hedge its Position and unexposed amount Price of Future Contract = 2000 (100 - 5.00 × 91 / 365) = ₹197507 No. of Contracts to be Sold = ₹1,00,00,00,000 / 197507 = 5063.11 i.e. 5063 Amount left exposed to risk = ₹1,00,00,00,000 - 5063 × ₹197507 = ₹1,00,00,00,000 - ₹99,99,77,941 = ₹22,059 Alternative Solution Price of Future Contract = (₹2000 × 100) / (1 + 0.05 × 91 / 365) = ₹197537 No. of Contracts to be Sold = 1,00,00,00,000 / 197537 = 5062.34 i.e. 5062 Amount left exposed to risk = ₹1,00,00,00,000 - 5062 × ₹197537 = ₹1,00,00,00,000 - ₹99,99,32,294 = ₹67,706

Topics: Interest Rate Futures

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