BBMF 2103 INTERNATIONAL TRADE FINANCE Tutorial 11 1 Suppose a borrower, Sykt. Jaguh, has a 5 year, RM5 million loan from Public Bank. Public Bank charges an interest based on 6 month KLIBOR +3% payable semi annually. How can Sykt Jaguh hedge against rising interest rates. Given these circumstances, the logical way for Sykt. Jaguh to manage the rate risk would be through a IRS. Sykt. Jaguh should enter the swap as the fixed rate payer and floating rate receiver. If the notional principal and reset frequency are structured to match the underlying position that it has with PBB, then Sykt. Jaguh would have perfectly hedged it’s interest rate risk. 2. Super Funds Sdn Bhd manages a money-market fund for corporate clients. The size of the fund is RM20 million, invested mostly in 3 month MGS (Malaysian Government Securities) and commercial papers. The returns approximate the 3 month KLIBOR. How can Super Funds Sdn Bhd hedge against falling interest rates Enter a 3 year IRS of RM20 million notional principal as the floating rate payer. Fig 12.4 shows the structure of the proposed IRS. 3. Mr. Lee a bond trader has just completed his assessment of interest rate outlook. He is convinced that rates are likely to rise steadily over the next 2 years. To take advantage of this likely rise, Mr. Lee intends to enter an IRS. What should his position be to benefit from rising rates? Answer : He should enter the swap as the fixed rate payer and floating rate receiver 4. What is a plain vanilla interest rate swap? Are swaps a significant source of capital for multinational firms? A plain vanilla interest rate swap is a swap to pay fixed/receive floating, or alternatively, pay floating/receive fixed. The plain vanilla interest rate swap is not a source of capital; it only alters the interest rate price on repayment of a theoretical—notional—debt principal.