Interest rate futures (IFRs) - part 2

In this lesson

1. 0:00 Interest rate futures hedging steps
2. 0:38 Calculating the number of contracts needed
3. 1:05 Fast forward and assess gains or losses
4. 1:50 Worked example: Belco borrowing scenario
5. 3:06 Choosing the correct futures contract date
6. 3:33 Buy or sell decision for IRF hedges
7. 4:10 Number of contracts calculation walkthrough
8. 5:02 Interest cost and futures outcome analysis
9. 7:14 Net position and effective interest rate
10. 8:31 Basis risk and timing mismatches explained
11. 11:52 Key takeaways on IRF hedging mechanics

About this lesson

You'll discover why IRFs work in the opposite direction to other hedging tools (because they're priced at 100 minus the interest rate), how to calculate the correct number of contracts needed, and how to combine your underlying transaction result with your futures gain or loss to reach a net position. This is essential knowledge for the Advanced Financial Management (AFM) paper, where IRF hedging questions require both conceptual understanding and precise calculation. The lesson also introduces basis risk—the small timing mismatch that occurs when your transaction date doesn't exactly align with standardised IRF dates—so you know what to watch for in exam scenarios. By following the step-by-step framework and working through realistic numbers, you'll build confidence in tackling IRF questions quickly and accurately under exam conditions.

Duration: 13m