LIC Signs $1 Billion Forward Rate Agreements to Hedge Bond Risk
Why in the news
LIC made a significant move into bond derivatives to hedge interest rate risk.
About FRAs
- A contract to exchange payments linked to short-term interest rates.
- Notional principal only calculates interest; it is not exchanged.
- The bank takes price risk and earns a premium.
Market impact
| Effect | Detail |
|---|---|
| Demand | More demand for long-term bonds |
| Auctions | Record bid-to-cover in the last two FY26 auctions |
| Banks | Hedge by buying long bonds, adding depth |
Significance
- Deepens the bond derivatives market and improves institutional risk management.
- Moves insurers towards modern liability-driven tools.
Exam angle
- Instrument: FRA; value: $1 billion.