Educorporation is seeking a RM 15 million loan to be drawn in 3 months. Its banker, Maybank has agreed to provide the loan at KLIBOR + 2%. The 3-month KLIBOR is being quoted at 5% while the, 3-month KLIBOR futures is 94.00.

a.  What target rate can Educorporation 'lock-in' using interest rates futures?

b.  Outline the hedge strategy using KLIBOR futures.

c.  Prove that the target rate has indeed been locked-in, even if rates rise 2% over the, next 3 months.

d.  Show how Educorporation could use an FRA to achieve the same goal of locking in a target interest rate? (Assume a counterparty and be specific about the terms).

e.  Show how Educorporation could have used an interest rate swap to lock-in the target rate (use a diagram, include / show the payments to Maybank).

Answer rating: 100% (QA)

a To determine the target rate that Educorporation can lockin using interest rates futures we need to calculate the implied rate from the quoted futures price Implied rate 100 Futures price Implied ra... View the full answer