CA Final · Advanced Financial Management · Interest Rate Risk Management
Sharma Textiles Ltd expects to borrow Rs 10 crore for 3 months starting 3 months from today and wants to protect itself against a rise in interest rates. Which FRA position should it take?
Sharma Textiles should buy a 3x6 FRA. The loan starts in three months and runs three months, matching the 3x6 period. A buyer of an FRA receives compensation when rates rise, which offsets the higher borrowing cost.
- ABuy a 3x6 FRACorrect
- BSell a 3x6 FRA
- CBuy a 6x9 FRA
- DSell a 6x9 FRA
Explanation
A 3x6 FRA covers a 3-month period that starts 3 months from now and ends 6 months from now. A borrower fears rising rates, so it buys the FRA and receives the settlement if the reference rate exceeds the agreed rate. Selling the FRA would protect a lender, not a borrower. The 6x9 FRA covers the wrong period.
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