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: (iv) Comment on the use of Interest Rate Futures to hedge the cost of borrowing by ABC Ltd.

Answer & Explanation:

By using Interest Rate Future ABC Ltd. has locked the interest rate somewhere near to 5% i.e. the rate at which Interest Future Contract are trading in April 2019.

Topics: Interest Rate Futures

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