CAF-7 · Chapter 10 · Question 10 of 15
A corporate treasurer expects to borrow Rs. 50 million in six months' time for a period of three months. To protect against a potential rise in KIBOR, the treasurer decides to use Short-Term Interest Rate (STIR) futures. What is the correct initial position to take?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Sell STIR futures contracts now
Explanation
Interest rate futures are priced inversely to interest rates (Price = 100 - Interest Rate). If the treasurer fears rates will RISE, he expects the future price to FALL. To profit from a falling price to offset his borrowing costs, he must SELL futures contracts initially.
More Financial Risk Management MCQs
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- Q15Why must the final settlement amount in a Forward Rate Agreement (FRA) be discounted back to present value using the reference rate?
- Q1Which of the following scenarios is a classic example of an operational (pure) risk rather than a strategic (speculative) risk?