BPP Mock Exam 3 Q.13

D is wrong because (as you will know if you have watched my free lectures) when you use futures it has to be in fixed size contracts. So it is unlikely you can hedge the exact amount needed - it will either be a bit too much or a bit too little. With regard to the interest rate collar - this is really more of a Paper P4 idea and BPP should not really have included it for Paper F9. It costs money to get an interest rate floor (you pay a premium for the option). To also have an interest rate cap (an upper limit on interest rates) as well - which is what a collar is - you sell an option to someone else who wants that limit. They way you a premium for the option which means that the net cost (paying for one option and receiving money for the other) is lower. I would not worry too much about the collar for Paper F9 - again it is more of a Paper P4 topic. If (as is very unlikely) this were to be asked, then you should be clear as to why A and C and (hopefully now D) are not correct, and therefore the right answer has to be B :-)

6 years on... This is now Q13 in ACCA FM Practice Exam 2. Thanks for the explanation, very helpful.

Thanks from OpenTuition Especially from John who is a fantastic tutor