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L4, L5. Risk Management for Changing Interest Rates: Asset – Liability …

- - - - V = value of cash flow to be hedged
      - F = face value of futures contract
      - Mc = maturity of cash assets
      - Mf = maturity of futures contacts
      - b = variability of cash market to futures market
- - - - Sell option
        
        Collects premium
        ,gives right to buy
      - BANK buys option
        
        Pays premium, gets right to buy
    - - Sell option
        
        Collects premium
        ,gives right to sell
      - BANK buys option
        
        Pays premium, gets right to sell
  - - - Price rises
        
        Buyers has right to buy at set price so gains from buying then selling
      - Price falls
        
        Buyers has right to buy at set price so loses premium
    - - Price rises
        
        Buyers has right to sell at set price so loses premium
      - Price falls
        
        Buyer has right to sell at set price so buys ar lower price & sells at set price