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Interest Rate Risk Management – ACCA Financial Management (FM)

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  1. Hi Mr. John,
    I am not quite sure how you got 2.75% in the lecture regarding the swap, but what I think is that we look for the difference between the 2 rates before and after the swap. Since X has better fixed and floating rates Y will however have to pay X for receiving the benefit. Although X will have to pay 2% more on fixed rates than before and Y would have to pay 3.5% less. Am I right in believing that the 2.75% is attained by taking the total change in % of 5.5%(2 + 3.5) and dividing it by 2?

    • No. There is a saving to be made of 1.5% which if they share equally is 0.75% each.

      Without swapping, X would have paid 10% and so with the saving must end up paying only 10 – 0.75% = 9.25%.
      Swapping means that they will be paying Y’s interest which is 12% and so to end up only paying 9.25% it means that Y will have to pay X the difference of 12 – 9.25 = 2.75%.
      (The same sort of workings can be done for Y resulting in the same payment).

      However appreciate that this is just to illustrate and that calculations on this cannot be asked in the exams until Paper AFM – not in Paper FM.

  2. Hi,
    Respected sir i am a visually disable student i take help from my mobile by using an application that read the notes’for me that what is written
    My question is that can i read the notes and avoide reading the book is that will be ok for pass the FM Paper.

    Kind regards

    • The notes on their own are not sufficient because it is important that you watch (listen) to the free lectures that are working through the notes. It is because the notes are just lecture notes and it is in the lectures that I explain and expand on the notes.

      If you are able to do that then you do not really need the textbook. However what is also important is question practice. I do not know how feasible it is for you, but ideally we recommend that you buy a Revision Kit from one of the ACCA Approved Publishers because they are full of past exam questions to use for practice.

      • Also I hope I am not intruding in this thread but when I purchased my BBP book there was a code in the first page that gives you access to the digital version and it uses the bookshelf app/software. Built into the software is a text to speech function that reads out the questions for you in a natural-ish sounding voice just like someone else was in front of you either reading the text or for the exam kit asking you the questions. That might be a consideration for the visually impared.

    • It is the missing figure.

      If they didn’t swap, X would be paying 10%. Because there is a saving of 1.5% to be shared equally, X must end up paying 10 – 0.75 = 9.25%.

      When they swap X pays Y’s interest of L + 6.5%, X then receives L from Y.. So far therefore X is paying 6.5%.
      In order to end up paying 9.25%, X must pay Y 9.25 – 6.5 = 2.75%.
      (You can do the same thing for Y and end up with the same transfer)

      However don’t worry about the arithmetic – calculations are not asked until Paper AFM. It is just being aware of the idea for Paper FM.

  9. Hi,

    I have not been entirely sure what the mechanism and the real reason behind the movements (interest up and futures down and vice versa). It might have been mentioned in the lecture – sorry if I missed it. But I have found a clear explanation:

    “Effect of Interest Income
    The futures price decreases when there is a known interest income because the long side buying the futures does not own the asset and, thus, loses the interest benefit. Otherwise, the buyer would get interest if he or she owned the asset.”

  10. It is the missing figure.

    If they did their own borrowing they would be paying 10%.
    Swapping gives a saving of 1/2 x 1.5% = 0.75%.

    Therefore the settling up must end up with X paying 10 – 0.75 = 9.25%

    Swapping means they will be paying 12%, so they settle up by Y paying X 9.25% which means X ends up paying 12 – 9.25 = 2.75%.

    Remember, however, that as I say in the lectures you cannot be asked to do this calculation in Paper FM – only to explain the idea behind swapping.

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