Hedging an Interest Rate Swap Setting On March 13, 2023, your swap desk has just entered into
Question:
Hedging an Interest Rate Swap Setting On March 13, 2023, your swap desk has just entered into a $100 million one-year SOFR interest rate swap that has 4 quarterly payment dates beginning in June, 2023. The swap is an IMM swap meaning each of the 4 quarterly accrual periods starts and end on a SOFR value date with payment made 2 business days after the accrual end date. You are paying fixed in the swap at a fixed rate of 4.5 percent against 3-month compound SOFR flat. Currently, the money market curve (used for discounting) is flat so that:
3-month term SOFR rate = 5.0%
6-month term SOFR rate =5.0%
9-month term SOFR rate = 5.0%
12-month term SOFR rate = 5.0%
Questions
1. Suppose compound SOFR ends up at 4.8% for the 3/15-6/21 period. first cash flow made on the swap? Do you pay it or receive it?
2. Indicate the SOFR futures contracts that should be used to hedge each of the swap payments.
Payment Date: Hedged with
June 23. ____________________________
Sep 23 : ____________________________
Dec 23: ____________________________
Mar 24: ____________________________
Hedging an Interest Rate Swap
3. Indicate the number of futures contracts you would buy or sell to hedge the one-year swap.
Contract Month: Number of contracts:
Mar 23. ____________________________
June 23: ____________________________
Sep 23: ____________________________
Dec 23: ____________________________