In January 2022, Ahmed, the financial director of an IT company, estimated that he needs RM10 million
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Question:
In January 2022, Ahmed, the financial director of an IT company, estimated that he needs RM10 million borrowing in June 2022 to carry out a project. Through its bank, the company can borrow at a rate that is 1 1/2 percent higher than the KLIBOR rate
The project is to be completed and the borrowed funds repaid in early March 2023. The financial director wants to lock-in the current borrowing costs because he is expecting Bank Negara to announce an interest rate hike in the future.
Additional information is given below.
| Contract Month | Price |
| Mar 2022 | 95.35 |
| Jun 2022 | 95.26 |
| Sep 2022 | 95.12 |
| Dec 2022 | 94.88 |
| Mar 2023 | 94.74 |
| Jun 2023 | 94.63 |
Assume the following rates are available at maturity.
| Date | Futures Price | 3-month KLIBOR |
| Mar 2022 | 95.25 | 4.75 percent |
| Jun 2022 | 95.10 | 4.90 percent |
| Sep 2022 | 94.96 | 5.04 percent |
| Dec 2022 | 94.23 | 5.77 percent |
Describe how he can hedge his borrowing costs using the three-month KLIBOR futures and the strategy.
Expert Answer:
To hedge his borrowing costs using the threemonth it is advisable for KLIBOR futures Ahmed the financial director to follow these steps 1 Determining ... View the full answer
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