The document discusses KLIBOR futures contracts, which are based on 3-month Kuala Lumpur interbank deposits. The futures price is quoted as an index calculated as 100 minus the interest rate. For example, a 7.5% deposit rate in the cash market corresponds to a 92.50 index price in the futures market. Buying a futures contract at 93.75 locks in a 6.25% borrowing rate, while selling at 92.50 locks in a 7.5% lending rate. The document provides an example of a company using KLIBOR futures to hedge interest rate risk on a RM20 million investment in 3 months.

1. Interest rate futures- KLIBOR futures
KLIBOR ( Kuala Lumpur Interbank Offer Rate) is simply the interest rate charged (or received)on short
term funds placed in the interbank market. The KLIBOR is an offer rate at which participants in the
interbankmarketare willingtolendfundstootherapprovedinstitutionsforvarioustenors- suchasone,
two, three, six, nine and twelve months. Many banks ude the KLIBOR rate as a benchmark for pricing
loans to corporations to corporations because the rate is objectively arrived at through the process of
borrowing and lending among a large number or market participants.
KLIBORfuturescontract isbasedon a 3-monthinterbankdepositinthe KualaLumpurwholesale market
havinga principal value of RM1 million. The futuresprice isquoted as an index, calculated as 100 minus
the interestrate per annum. For example, a deposit quoted in the cash market at a rate of 7.5% would
have an index price of 92.50 in the futures market. This means that when interest rate fall in the cash
market,a longfuturespositionincreasesin value.Put simply, as interest rates rise, the price of futures
falls and vice versa. Minimum price fluctuation is 0.01% ( 1 tick) which is equivalent to RM25.
If you buya KLIBORfuturescontract at 93.75, you have enteredintoanagreementtoinvestRM1 million
at a rate of 6.25% p.afor a term of three monthsbeginningonthe date of expiryof the futurescontract.
Conversely, if you sell a KLIBOR futures contract at 92.50, you have entered into an agreement to
borrowRM 1 millionatarate of 7.50% p.a for a term of three monthsbeginningonthe date of expiry of
the futures contract.
Example:
Company A intends to invest RM20 million in the interbank market in three months’ time. The company
can usethe futuresmarketto set a firm rate,protecting itself froman interest-ratedown turn. Assuming
it is now March, the current price of June KLIBOR futures is 90.94. It uses the June contract because it
coincides withthe timing of its anticipated physicaltransaction.Threemonths later,the company makes
the actual investment in cash market. Interest rate is at 7.5%.
Basedon the informationgiven,outline yourhedgingstrategy.

2. Cash market Futures market
March
Receivesnotificationof RM20,000,000 surplusin
three months.
What iscurrent interestrate?
March
Position?
What isfuturesprice?
Num.of contract ?
Value tobe hedge/principal of futurescontract
June
Interestrate is7.5%.
Action?
Gain oninterest?
Netgain/lossafteradjustingwithfuturesmarket?
Effective interestrate:
June
What iscurrent futuresprice?
Position?
Gain/lossinfuturesmarket?