Outturn: Difference between revisions
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'''Example 1''' | <span style="color:#4B0082">'''Example 1'''</span> | ||
If hedging a borrowing with an interest rate option with a strike price of 6%. | If hedging a borrowing with an interest rate option with a strike price of 6%. | ||
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'''Example 2''' | <span style="color:#4B0082">'''Example 2'''</span> | ||
So continuing the same example, and assuming an option premium paid of 0.5%. | So continuing the same example, and assuming an option premium paid of 0.5%. | ||
Revision as of 15:02, 13 November 2015
1.
'Outturn' market rates are the rates or prices which actually occur in the relevant market - in other words the rates which 'turn out' to be the case in the market.
Outturn market rates may be compared with, for example, forecast rates, expected rates, or hedged rates.
Example 1
If hedging a borrowing with an interest rate option with a strike price of 6%.
At an outturn market rate of 8% the borrower's option would be exercised (and pay out to the holder assuming it was cash-settled).
At an outturn market rate of 5% the borrower's option would lapse worthless.
Outturn rates in this sense are related to - but different from - the all-in hedged rates achieved.
The hedged rate achieved means the total income or expense resulting, taking account both of the underlying exposure and of the hedging instrument.
Example 2
So continuing the same example, and assuming an option premium paid of 0.5%.
i. At an outturn rate of 5%
The hedged rate borrowing achieved:
= 5% market rate + 0.5% option premium
= 5.5%.
ii. At an outturn rate of 8%.
The hedged borrowing rate achieved:
= 6% option strike price + 0.5% option premium
= 6.5%.
2.
The result or the net result of any activity.
3.
The all-in hedged rate or outcome achieved, as a result of hedging activities.
