Question

a) You have just received the following information from your broker regarding
spot rates;

3-month KLIBOR = 7.20%
6-month KLIBOR = 8.55%
(i) Calculate the implied forward rate.

(ii) Determine the correct price of a 3-month KLIBOR futures contract.

b) As Credit Officer of a large Malaysian bank, you have agreed to provide an
important institutional customer with a fixed rate 3-month RM20 mil for 90 days
from today and you had priced the loan at 12% per annum. Your cost of funds
is the KLIBOR rate. Today’s quotations are as follows:

3-month KLIBOR = 9.00%
6-month KLIBOR futures = 90.0

(i) Outline the appropriate hedging strategy to protect you from the risk of
a rise of interest rate.

(ii) If interest rates rise or fall by 2% over the next 3 months, prove that
your hedge strategy above would have protected your interest spread
or total earnings.

Answer 1

i) Let the implied forward rate be r

[1 + (r n tenor/360)] = [1+(long rate long tenor/360)] / [1+(short rate short tenor/360)]

1 + (r 90/360) = [1 + (0.0855 180/360)] / [1 + (0.0720 90/360)]

r 90/360 = (1.04275 / 1.018) – 1

r 90/360 = 0.0243

r = 0.0972 = 9.72%

ii) The correct price of a 3-month KLIBOR futures contract = 100-9.72 = 90.28