9

Forward interest rates

Definitions

Example forward rates

Hedging principles

Forward rate agreement

Yield curves

Exercise

Summary

 

File: MFMaths3e_09.xls

DEFINITIONS

This chapter deals with interest instruments and models of future interest rates and pricing. Swaps are one way of controlling risk on interest rates; interest rate agreements provide another method of reducing future uncertainty by controlling funding costs.

For example, if a treasurer needed to borrow money in six months’ time and fix the rate of interest now, he would have the choice of:

  • borrowing now and investing the funds until needed;
  • investing now and funding by borrowing.

This may not be the best use of company funds since it could use up limited company credit lines ...

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