How to hedge floating interest rate risk with forward interest rate? Detailed, example
It's simple. For example, if you buy a house and are afraid of rising interest rates, you can buy treasury bonds futures to hedge against rising interest rates. If the interest rate rises, the interest you pay will rise, while the price of national debt will fall. Your short position can bring the difference income and make up for your interest loss. Similarly, if the interest rate falls, the interest you pay falls, and the price of national debt rises, resulting in the loss of price difference. Hedging can avoid risks in principle and cannot be used to create income. In the above example, it just helps you determine the interest expense.