Question

b) Suppose the pension fund you are managing is expecting an inflow of funds of K100, 000 next year and you want to make sure that you earn the current interest rate of 8% when you invest the incoming funds. How would you use the futures market to do this? [10 marks]
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Answer 1

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Answer:

b)

A long term future contract can be bought with a year maturity from now for a value of $100 million. The total contract size in this case would be $100M/$100,000 = 1000 contracts.

This ensures from the futures market that we would be receiveing the long term bonds at a year from now at the price agreed today and thus earning the expected interest rate of 8%

Apart from this we are also having an of interest rate swaps to ensure the return at a rate of 8%with the exchange of another rate of interest. By doing so both parties can ensure the required rate of return or cashfows.