The document discusses interest rate risk and how interest rate swaps and futures can be used to hedge against it. Specifically, it notes that if interest rates rise beyond a fixed rate, firms will incur losses from interest rate risk. It provides an example of a TV firm that lends at a fixed 12% rate but borrows at a variable rate of LIBOR + 0.25%, exposing it to interest rate risk. The document states that interest rate swaps and futures contracts traded on exchanges through brokers can be used to hedge against the risk of rising or falling interest rates.

1. 25-2010

2. When borrower
expect a rise in
interest rate
When expect a
fall in interest
rate

3.  If LIBOR moves up beyond the fixed rate, then
there will be loss to the firm , this loss is known
as interest rate risk
Use of interest rate swap for hedging
 a television firm provides loan to its customers
for financing the purchase of television at a
fixed rate of 12 per cent. Such loans are
financed by medium- term notes that the firm
issues at LIBOR + 0.25 per cent. LIBOR is 7.0 per
cent, and the administrative and the other costs
involved in borrowing/lending come to 2.0 per
cent

5. Interest rate futures are just like currency futures contracts bought
and sold for hedging the interest rate risk.
IRFS are used in
Falling interest
Rising interest rate
rate
IRFs market is like currency futures market where contracts
are made in the pit of the organized exchange through an
authorized exchange through authorized brokers.