From the banker’s point of view, when the banker quotes a floating interest, in doing so, the banker is passing on the interest rate risk to the borrower. • What if the banker has to quote a fixed interest rate but his cost of funds are floating? In this case, the customer/borrower faces no risk but the banker does. • Example: As a Credit Officer bank you have agreed to provide a customer with a fixed rate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12% annual interest rate. • The following quotes are available in the market. 3-month KLIBOR = 9 % 3-month KLIBOR futures = 90.0 (matures in 90 days) How would you protect yourself from a rise interest rates?

From the banker’s point of view, when the banker quotes a floating interest, in doing so, the banker is passing on the interest rate risk to the borrower. • What if the banker has to quote a fixed interest rate but his cost of funds are floating? In this case, the customer/borrower faces no risk but the banker does. • Example: As a Credit Officer bank you have agreed to provide a customer with a fixed rate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12% annual interest rate. • The following quotes are available in the market. 3-month KLIBOR = 9 % 3-month KLIBOR futures = 90.0 (matures in 90 days) How would you protect yourself from a rise interest rates?

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter8: Current And Contingent Liabilities

Section: Chapter Questions

Problem 81.2C

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Financial Risk Management QUESTION 1 : Protecting Interest Income/Revenue• From the banker’s point of view, when the banker quotes a floating interest, in doing so, the banker is passing on the interest rate risk to the borrower.• What if the banker has to quote a fixed interest rate but his cost of funds are floating?In this case, the customer/borrower faces no risk but the banker does.• Example: As a Credit Officer bank you have agreed to provide a customer with a fixedrate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12%annual interest rate.• The following quotes are available in the market.3-month KLIBOR = 9 %3-month KLIBOR futures = 90.0 (matures in 90 days)How would you protect yourself from a rise interest rates?
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