CA Final · Advanced Financial Management · Interest Rate Risk Management
Meridian Textiles Ltd expects to borrow Rs 10 crore for 6 months starting 3 months from now and wants to lock in its borrowing cost. Which FRA position should it take?
Meridian should buy a 3x9 FRA. A borrower is hurt by rising rates, so it pays the fixed rate and receives the floating reference rate. The borrowing begins in three months and ends in nine months, which matches the 3x9 FRA period.
- ABuy a 3x9 FRA (pay fixed, receive floating)Correct
- BSell a 3x9 FRA (receive fixed, pay floating)
- CBuy a 9x3 FRA
- DSell a 6x9 FRA
Explanation
A borrower fears rising rates, so it buys an FRA: pays the fixed agreed rate and receives the reference rate. The loan starts in 3 months and ends in 9 months, so the FRA is 3x9. Selling would benefit from falling rates and would increase exposure; 6x9 covers the wrong period.
Did you get it right without looking?
One question tells you little. A timed set on Interest Rate Risk Management shows your real accuracy, how long you take and where you lose marks.
More Interest Rate Risk Management questions
- Kaveri Industries buys a 3x9 FRA from a bank for a notional principal of ₹10,00,00,000 at an FRA rate of 7.00% p.a. The contract period is 1…
- Bharat Logistics will draw a ₹20 crore loan in 3 months for a 3-month period, at floating 3-month MIBOR plus 1% p.a. To fix its cost, it buy…
- A bank has sold a 3x6 FRA to a corporate on a notional ₹50 crore at 7.00% p.a. On the settlement date the reference rate is 6.40% p.a. Which…
- Arjun Industries wants to hedge a Rs 50 crore borrowing for months 6 to 12. The market gives a 6-month rate of 6% p.a. and a 12-month rate o…
- Mehta Industries buys a 6x12 FRA on a notional Rs 20 crore at an agreed rate of 8% p.a. At settlement (start of the 6-month period) the refe…
- Meridian Textiles Ltd expects to borrow Rs 10 crore for 6 months starting 3 months from today and wants to lock in its borrowing cost using …