Interest rate management: put to the test

Article Abstract:

The example of a company financing itself with a variable rate loan is used to illustrate how interest rate exposure can be managed through hedging techniques. The company is borrowing at variable rates and requires a one-year fixed interest rate exposure. The alternatives available to the firm include: buying forward rate agreements to fix borrowing costs; buying financial futures to fix borrowing costs; and buying an interest rate cap to establish a ceiling over its financial costs. The case scenario indicates that there is no one best strategy for all scenarios, and that choosing the best strategy relies on the ability of a firm to withstand negative cash flow consequences and the firm's aversion to risk. Other considerations for selecting the best hedging technique include a firm's level of debt, its borrowing capacity, and covenants entered into with banks and trustees.

Methods, Analysis, Hedging (Finance), Interest rate futures

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The London Code of Conduct

Article Abstract:

The newest edition of the Bank of England's London Code of Conduct has recently been released. The Code articulates the general standards and controls that should be followed by broking firms and 'core principles,' such as building societies, banks and financial institutions authorized under the Financial Services Act 1986, when business deals are made concerning relevant financial products. Aside from general standards, the Code addresses such concerns as dealing mandates and relationships, knowing the counterparty, and documentation. The rights and obligations embodied in the Code are not backed by any regulatory force and are not implemented through direct financial sanctions. However, the Assn. of Corporate Treasurers recommends the Code to its members as standards of best practice for making transactions in the London wholesale markets.

Financial Services, Finance and Insurance, Regulation, Licensing, and Inspection of Miscellaneous Commercial Sectors, Financial Regulation NEC, Standards, Bank of England, Financial services industry, Commercial law, Business ethics

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