Skip to content

ACCA Applied Skills · Financial Management · Hedging techniques for interest rate risk

Orla Co will need to borrow $12 million in 4 months for 5 months. Which FRA should it use, and what is the quoted notation?

Orla should buy a 4v9 FRA. A borrower fears rising rates, so it buys the FRA. The notation runs from the start of the loan at month 4 to its end at month 9, covering the five-month borrowing period.

  1. ASell a 5v9 FRA
  2. BBuy a 4v9 FRACorrect
  3. CBuy a 4v5 FRA
  4. DSell a 4v9 FRA

Explanation

Borrowers protect against rising rates by buying an FRA. The loan starts in 4 months and ends in 4 + 5 = 9 months, so the FRA is 4v9. A 4v5 FRA would cover only one month and selling suits depositors.

Did you get it right without looking?

One question tells you little. A timed set on Hedging techniques for interest rate risk shows your real accuracy, how long you take and where you lose marks.

Practise Hedging techniques for interest rate riskFree diagnostic mock

More Hedging techniques for interest rate risk questions