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Outline appropriate hedging strategy to protect your company

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Question - As Treasurer of Gombak Finance Berhad you are worried about the potential interest rate risk on fixed rate 3-month RM12 million loan you have promised a customer. The loan will be taken 90 days from today and you had the priced the loan at 11% per annum. Your company's cost of funds is the KLIBOR rate. Today's quotations are follows:

3-month KLIBOR = 8%

3-month KLIBOR futures = 91.0

Outline the appropriate hedging strategy to protect your company from interest rate risk.

Suppose interest rate rise by 1.5% over the next 3 months, prove that hedge strategy above would have protected your interest spread or total earnings.

Reference no: EM133067471

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