Case study

The question :

How any potential borrower requesting the same type of credit may manage exposure to interest rate risk? Identify the alternate tools available to management?

In the case of Garda Investment Associates, the first portion of the loan is specified as what can be known as a floating rate. This is essentially a combination of LIBOR (London Inter-bank Offered Rate) and a fixed rate. 

Borrowers subject to similar loan terms are exposed to changes in interest rate, since the LIBOR portion can freely move according to market oscillations. In case of a rate increase, the borrower would be subject to a higher cost on the funds borrowed.  In order to mitigate some of the risks associated with rates movements, borrowers can use different instruments available in the market:

• Interest Rates Swaps
• Interest Rates Futures Contracts
• CME LIBOR Futures Contracts