Interst rate hedging

Google+0
LinkedIn0

Home › Forums › Ask ACCA Tutor Forums › Ask the Tutor – P4 Exams › Interst rate hedging

This topic contains 1 reply, has 2 voices, and was last updated by Avatar of johnmoffat John Moffat 1 year ago. This post has been viewed 18 times

Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • November 18, 2012 at 4:08 am #55430
    avatar
    dazhong0703
    Participant

    What are the differences between interest rate guarantee, interst rate cap/floor/collar, and interst rate options, pls? Why are the benefits to choose one of them, but not others, pls?
    Thank you.

    November 18, 2012 at 9:15 am #107751
    Avatar of johnmoffat
    John Moffat
    Keymaster

    An interest rate guarantee fixed the interest rate. That is great in terms of the fact that there is no risk of it changing, but not so good it you expect interest rates to fall (assuming you are borrowing).
    Interest rate options let you get the benefit of lower interest rates, but limit the maximum. The downside is that there is a premium payable whether or not you exercise the option. (Limiting the maximum interest rate is fixing a cap; if we were investing then we would want to limit the minimum interest rate – this is a floor).

    Using a collar means we can fix a maximum interest rate but reduce the net premium by accepting also a minimum interest rate (again, assuming we are borrowing money).

  • Author
    Posts
Viewing 2 posts - 1 through 2 (of 2 total)

You must be logged in to reply to this topic.

Problems with notes or lectures?

If you are having problems with downloading notes or watching lectures please visit the support page>>