Billy Surya Hendryko20140500315th May, 2015MBA Assignment

Amben Ltd can consider to use either forward rate agreement or interest rate futures to hedge against the risk of the rise of interest rate for 6 months. Both forward rate agreement (FRA) and interest rate futures can help Amben Ltd to lock into position in which Amben Ltd think is more favorable in an attempt to hedge against the rise on interest rate.

A forward rate agreement (FRA) allow an enterprise to lock in an interest rate today for a period of time starting in the future. Using FRA, Amben Ltd can fix the interest rate on a loan or deposit starting at a date in the future.

Interest rate futures allow Amben Ltd to bought and or sold 'now' for settlement at a future date with standard settlement dates are normally in March, June, September, and December.

1) Forward Rate AgreementIn the case that Amben Ltd decided to use forward rate agreements to hedge against

the rise, Amben Ltd can fixed the interest rate at 7.5% which will be the effective borrowing rate for Amben Ltd.

Interest Payable = 9% x $2,000,000 x 6/12 = 90,000Amount Receivable on FRA = (9% - 7.5%) x $2,000,000 x 6/12 = (15,000)Net Amount $75,000

If the interest rate did rise 1.5% which will be 9%, the hedge will resulted in gain on FRA which will then help to offset the rise of interest rate. The net amount payable will be $75,000 and with 7.5% as the effective borrowing rate.

2) Interest Rate FutureTo hedge against the risk of the rise of interest rate using interest rate future, Amben

Ltd can sell the futures and buy the futures in September.

Number of contracts sold = ($2,000,000/ $1,000,000) x 6/3 = 4 contracts

Amben Ltd should sell 4 May contracts of interest rate futures with effective borrowing rate of 7.5%.