LIC working with Wall Street banks to hedge $1B risk
What's the story
The Life Insurance Corporation of India (LIC), the country's largest insurer, is working with leading Wall Street banks such as JPMorgan Chase & Co. and Bank of America Corp. to hedge its liabilities, Bloomberg reports. The company has entered into bond forward rate agreements (FRAs) worth $1 billion with these financial giants in the last two months.
Market entry
LIC's increasing activity in the bond derivatives market
Back in November, LIC had announced its plans to enter the bond derivatives market. The company made a few small trades earlier this year but has since increased its activity significantly. Its recent deals now account for 38% of the total $2.6 billion in forward rate agreement volumes since May, according to data from Clearing Corp. of India's website.
Investment strategy
Why are insurers interested in FRAs?
As more Indian families invest in financial markets, insurers like LIC (which oversees $630 billion in assets) are pushing for a wider range of investments and hedging options. FRAs have become particularly popular as they let insurers lock in future bond yields and protect them from falling interest rates that could cut into their income.
Trading mechanism
What is an FRA practice?
In an FRA, an insurer agrees to purchase a bond at a predetermined price on a future date. The counterparty, usually a bank, assumes the risk of changes in bond prices and receives a premium in return. To mitigate this risk, banks often buy long-term bonds that correspond with the contract's terms.
Market impact
LIC's moves are shaping India's financial landscape
LIC's increased activity in the FRA market has spurred demand for long-term bonds. The last two auctions for these bonds have recorded the highest bid-to-cover ratios of the current fiscal year, which began on April 1. This data was compiled by Bloomberg and shows how LIC's strategic moves are shaping India's financial landscape.