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MA future is a derivative that is used to transfer the


price risk of the underlying instrument from one
party to another.

M A future is thus a contract between two parties


whereby the one party (the buyer) agrees to buy an
underlying asset from the other party to the contract
on a specific future date, and at a price determined at
the close of the contract.
A futures contract is thus

ºAn agreement between two parties


ºTo buy and sell
ºA standardised type and quantity
ºOf a specified underlying asset
ºWith a certain quality
ºAt a price determined at the closing of the contract
ºOn a specified date
ºThrough a central exchange.
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it helps you manage risk with integrated debt, currency, interest rate and
commodity solutions and also provide efficient funding and liquidity
management to the corporate, institutional and government clients.
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÷tructures to fit your broader risk management policy
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÷ophisticated credit management strategies to reduce credit risk
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6ustomized solutions and a range of products structured using our analytical
and risk management expertise
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motentially add significant value to your dollar bond issues and equity offerings,
as well as cross-border M&A deals
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÷olutions to help neutralize market risk and seize market opportunities
interest rate Derivatives
An    is a derivative where the
underlying asset is the right to pay or receive a notional
amount of money at a given interest rate.
MThe interest rate derivatives market is the largest
derivatives market in the world.
MThe Bank for international ÷ettlements estimates that
the notional amount outstanding in June
2009 were U÷  trillion for OT6 interest rate
contracts, and U÷ 2 trillion for OT6 interest
rate swaps.
MAccording to the international ÷waps and Derivatives
Association, 80% of the world's top 500
companies as of April 200 used interest rate
derivatives to control their cash flows. This
compares with 5% for foreign exchange options,
25% for commodity options and 10% for stock
option
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interest rate derivatives can be an effective way to cut exposure to economic risk. it
helps to draws on real-time financial data and a global market perspective to develop
strategies that can neutralize market risk and bring new opportunities within reach.


Minterest Rate ÷waps
Minterest Rate 6aps / Floors / 6ollars
MTreasury Locks, 6aps and 6ollars
M6ross 6urrency ÷waps
M÷waptions
MBudget 6ap
MForward Rate Agreements
  
„        

Among the most popular of derivative instruments, interest rate swaps are used by
corporations, government entities, and financial institutions to manage interest rate
risk.
÷waps can be applied to a wide range of hedging needs and can be easily tailored to
match a specific risk profile. Their simplicity and flexibility have made them the
workhorse of the risk manager's toolbox.
A swap is an agreement to exchange interest payments in a single currency for a
stated time period. Note that only interest payments are exchanged, not principal.
÷wap terms are customized to meet the user's specific risk management objectives.
Terms include starting and ending dates, settlement frequency, the notional amount
on which swap payments are based, and reference rates on which swap payments are
determined.
Reference rates are published rates such as LiBOR or benchmark Treasuries, or
customized indexes crafted to meet the client's needs.

 

Treasurers use swaps to hedge against rising interest rates and to


reduce borrowing costs. Among other applications, swaps give
financial managers the ability to:
Mconvert floating rate debt to fixed or fixed rate to floating rate
Mlock in an attractive interest rate in advance of a future debt
issue
Mposition fixed rate liabilities in anticipation of a decline in
interest rates
Marbitrage debt price differentials in the capital markets
Financial institutions, pension managers and insurers use swaps to
balance asset and liability positions without leveraging up the
balance sheet and to lock-in higher investment returns for a given
risk level.
     
MFixed-for-floating
swaps
MForward-starting swaps
MBasic swaps
M÷waps with imbedded options
     
        
6aps and floors are essential tools in managing floating rate liabilities
while minimizing hedging and opportunity costs. They protect against adverse
rates risk, while allowing gains from favourable rate movements. 6aps and
floors are forms of option contracts, conferring potential benefits to the
purchaser and potential obligations on the seller. When purchasing a cap or
floor, the buyer pays a premium- typically up-front.The premium amount
depends on the specified cap or floor rate and time period covered, which
may range from a few months to several years.

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6aps and floors greatly enhance a treasurer's flexibility in managing
financial assets and liabilities. Used together or in combination with other
hedging instruments, caps and floors are efficient tools for reconfiguring a
company's financial risk profile.
6ontinued«.
  
MRedge floating-rate liabilities
MReduce borrowing costs
Mincrease investment returns
M6reate synthetic investments
MNeutralize options embedded in assets or liabilities
  
A cap creates a ceiling on floating rate interest costs. When market
rates move above the cap rate, the seller pays the purchaser the difference. A company
borrowing on a floating rate basis when  month LiBOR is 6% might purchase a % cap,
for example, to protect against a rate rise above that level. if rates subsequently rise to
9%, the company receives a 2% cap payment to compensate for the rise in market rates.
The cap ensures that the borrower's interest rate costs will never exceed the cap rate.
  
A floor is the mirror image of a cap. When market rates fall below the
floor rate, the seller pays the difference. A 6% floor triggers a payment to the purchaser
whenever market rates drop below 6%. Asset managers buy floors to guarantee a
minimum return on floating rate assets. They sell floors to generate incrementally higher
returns. Debt managers buy floors to protect against opportunity losses on fixed rate
debt when rates fall. They may sell floors as a component of a hedge strategy involving
other derivative instruments.
   
         
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Many companies today are considering the issuance of fixed-


rate debt to lock in cost- effective funding and strengthen
their capital base.

There are a number of hedging tools available which can


reduce the impact of interest rate fluctuations on prospective
debt issues.
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6ross-currency swaps offer companies opportunities to reduce
borrowing costs in both domestic and foreign markets.

They are also a simple and effective solution to long-term currency


hedging needs.
investors use cross-currency swaps to manage the currency risk in
foreign investment portfolios and to create synthetic assets with a
specific currency risk profile.
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A currency swap involves the exchange of payments denominated in
one currency for payments denominated in another. mayments are
based on a notional principal amount the value of which is fixed in
exchange rate terms at the swap's inception.
meriodic swap payments are made in the appropriate currencies based
on specified reference interest rates. When the swap matures, a final
payment representing the change in the value of the swap notional
principal is made between parties to the swap. Alternatively, the
principal values can be re-exchanged at maturity at the original
exchange rate.
Because currency swaps involve exchange risk on principal, the credit
risk associated with these transactions is substantially greater than
with interest rate swaps.
   
6orporations and financial institutions use currency swaps to
manage the exchange and interest rate risks associated with
foreign currency financing and investing. 6urrency swaps are also
valuable as long term hedges of translation risk and in many
instances represent an attractive alternative to long-dated forward
foreign exchange cover.
6urrency swaps can be used in a variety of situations. By using
them companies can:
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interest rate swaptions give the holder the right, but not the
obligation, to enter into or cancel a swap agreement at a
future date. The buyer may purchase either the right to
receive a fixed rate in the underlying swap or to pay the fixed
rate.
%    

÷waptions are options on swaps. Like swaps, they offer


protection against adverse movements in interest rates, and
are frequently used to minimize financing or hedging costs.
6ombined with other instruments, swaptions are often used
to solve more complex risk management challenges.
„   " 

Financial managers buy or sell swaptions to hedge


future interest rate exposures or manage borrowing
costs:
M%   
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An FRA is a tailor-made futures contract. As the name implies, it is an agreement to fix a
future interest rate today, for example the 6 month LiBOR rate for value  months from now (a  X
9 FRA in market terms). When the future date arrives the FRA contract rate is compared to actual
market LiBOR. if market rates are higher than the contract rate, the borrower/FRA buyer receives
the difference; if lower, he pays the difference. For the investor/FRA seller, the FRA flows would be
reversed. Underlying borrowing or investment programs proceed normally at market rates, while the
compensating payment provided by the FRA brings the hedgers' all-in cost or yield back to the base
rate contracted for in the FRA.

 
6ompanies use FRAs to protect short term borrowing or investment programs from
market surprises. For example, a borrower with debt rollovers coinciding with a scheduled meeting of
the Federal Open Market 6ommittee, uses FRAs to lock rollover rates in advance.
FRAs also allow companies to take advantage when the yield curve inverts (long term rates
fall below short term rates). When this happens a company which plans to borrow in the future
would use FRAs to lock-in a future borrowing base rate at a level lower than today's rates.
FRAs are also valuable in making temporary adjustments to long term financial positions.
For example, a company which has swapped floating rate debt to fixed can use FRAs to improve the
swap's performance in the short run when short term rates are expected to decline. in this instance
FRAs protect the value of future swap floating rate receipts from the impact of falling rates.
6ontinued«
„    
Most treasurers manage short term interest rate exposure by adjusting
maturities on commercial paper issuance or changing from one LiBOR reset option to
another on bank debt. Borrowers lengthen maturities when rates are expected to rise,
shorten when they expect rates to drop. ÷ometimes, however, market movements can
outstrip the treasurer's abilities to manage rate exposure using cash market alternatives
alone.
Forward Rate Agreements (FRAs) were invented to fill this gap. FRAs offer a
simple way to manage short term rate exposures without tying up the balance sheet.
 
Very short-term caps and floors (caplets and floorlets) complement FRAs in
managing short term rate risk. ÷ingle period caps and floors limit exposure to very short
term adverse rate movements while preserving the benefits of favorable market shifts.
6aplets and floorlets used in combination create cost effective hedges to fit
almost any interest rate scenario.
Each of these tools enhances a hedge program by providing added flexibility and unique
opportunities to improve control over short- term reinvestment and rollover rate risk.
!
A ! is designed to hedge a company·s exposure only
to sustained interest rate movements. it establishes a maximum  
   the hedger will pay out over the life of the cap.

!
 Budget cap is its cost effectiveness.
 mremiums for budget caps are below the premiums for conventional
caps.
 Redge the total interest expense over a specified time period

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 No payments are made under the cap until the cap·s maturity date, the
hedger interim cash flow benefits provided by conventional cap hedges.
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To establish the terms of the terms of the cap, the hedger
determines how much principal to hedge, the maximum (capped)
dollar amount of interest over the caps life, and the final maturity
of the cap.

For each interest period, the    is


determined by the formula:
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MARGiN÷
·A margin is collateral that the holder Of a financial
instrument has to deposit to cover some or all of the credit
risk of his counterparty .

„  


·„arket liquidity isan asset¶s ability to be sold


without causing a significant movement in the price
and with minimum loss of value.
   

Open interest (also known as open contracts or open


commitments) refers to the total number of derivative
contracts, like futures and options, that have not been
settled in the immediately previous time period for
a underlying security.
6ONTRA6T ÷iE
he deliverable quantity of goods or commodities underlying
futures, forward and option contracts. Each contract will have a
well defined contract size.

  S E
At the Bombay ÷tock Exchange, after a reduction of the tick
size , The sizes now range from 5 paisa to 50 paisa as against 25
paisa to Rs. 2 .
ERES RAE FUURE

MAn interest rate future is a financial derivative with an


interest-bearing instrument as the underlying asset.
MExamples:-
reasury-bill futures, reasury-bond futures
and Eurodollar futures.
Mhe global market for exchange-traded interest rate futures
by the Bank for nternational Settlements at $5,794,200
million in 2005

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