Hedging Borrowing

Richard wants to borrow £1,000 for 6 months starting in 3 months time.
The GBP 3 month forward interest is 13.0%.
The GBP 9 month forward interest is 13.1%.
The forward rate would be 12.74%.
How can the bank hedge against the exposure to interest rate risk.


Buying an Forward Rate Agreement

If you are going to borrow cash in the future you can buy an FRA (in advance) to hedge the interest rate risk.
You can then borrow the money at the time you need it.
Buying an FRA and borrowing cash achieves the same net effect as buying a forward-forward which is settled at the start of the loan period




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