ACCA AFM · Guided practice (Show me how)
Chapter 20: Interest Rate Risk Management (1)
Forward rate agreements and interest rate guarantees
(a) It is now 1 June. X plc will borrow GBP 500,000 for 9 months starting on 1 September, 3 months from now. Its bank quotes an FRA at 10% a year. The actual rate for the loan when it starts could be 13% or 8%.
(b) It is now 1 August. Y plc will borrow $200,000 for 6 months starting on 1 December. The bank offers an interest rate guarantee at 12% a year for a premium of $1,500, payable now. The actual rate when the loan starts could be 13% or 8%.
Use the tutor's undiscounted settlement method. Annualise the net cost over the loan period; do not add financing interest to the premium.
(a) The FRA if rates rise
Identify the FRA and calculate its settlement and effective borrowing rate for the loan from 1 September if rates rise.
(a) The FRA if rates fall
Calculate the FRA settlement and effective borrowing rate for the loan from 1 September if rates fall.
(b) An interest rate guarantee
Calculate the total cost and effective annual borrowing rate with the guarantee for the loan from 1 December in both scenarios.
Opening this exercise…