Bachelor in FInance and Credit

Topics: Derivative, Futures contract, Derivatives Pages: 4 (3034 words) Published: October 26, 2014
Table of Contents TOC o 1-3 h z u HYPERLINK l _Toc385810259 1.Introduction PAGEREF _Toc385810259 h 3 HYPERLINK l _Toc385810260 2.Possibilities to hedge an interest rate risks PAGEREF _Toc385810260 h 3 HYPERLINK l _Toc385810261 2.1 Financial futures as an instrument to hedge the risk PAGEREF _Toc385810261 h 4 HYPERLINK l _Toc385810262 2.2 Forward rate agreement against interest rate changing PAGEREF _Toc385810262 h 5 HYPERLINK l _Toc385810263 2.3 Options and Swaptions PAGEREF _Toc385810263 h 6 HYPERLINK l _Toc385810264 3.Pros and Cons of derivatives used for hedging the risk PAGEREF _Toc385810264 h 8 HYPERLINK l _Toc385810265 4. Conclusion PAGEREF _Toc385810265 h 10 HYPERLINK l _Toc385810266 5.List of Sources PAGEREF _Toc385810266 h 11 Introduction Taking a risk position that is opposite to an actual position that is exposed to risk means hegding. The bright example to clearify what hedging means is the followig the exposure to interest rate risk for the financial institution that issue debt is created by volatility of interest rate. A firm which usually arrange not long term loans from its bank under a variable interest rate agreement exposed to the risk. This risk is about increading of interest rate and it will affect borrowing costs. It is frequently happen that companies that reissue commercial papers are faces the possibility that new rates increasing and cut into forecast income. But the borrowings are high and the potential cost might be sustantial. Companies make a solution here, they choose the hedge their position through entering into a transaction. It will produce a gain nearly at the same amout as the possible loss in case of increasing of interest rate. In short, hedging for companies means that they take an action that expected to produce exposure to a type of risk that is the opposite of a real risk to which the firm has already exposed. By definition, every type of business is subject to the risk of increasing...
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