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FRA

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › FRA

  • This topic has 2 replies, 2 voices, and was last updated 6 years ago by kellyanbatchu.
Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • November 20, 2015 at 12:35 pm #284145
    zhaoyunyi
    Member
    • Topics: 21
    • Replies: 6
    • ☆

    When hedging interest rate by FRA, if we are told that we can borrow at LIBOR + 1%, and FRA is 5%. Does it mean we can borrow at 5% or 6%?

    February 18, 2016 at 5:18 pm #301055
    kellyanbatchu
    Member
    • Topics: 0
    • Replies: 5
    • ☆

    Question

    Assume that it is now 1 June. Your company expects to receive £7.1 million from a large
    order in five months’ time. This will then be invested in high-quality commercial paper for a
    period of four months, after that it will be used to pay part of the company’s dividend. The
    company’s treasurer wishes to protect the short-term investment from adverse movements
    in interest rates, by using futures or forward rate agreements (FRAs).
    The current yield on high-quality commercial paper is LIBOR + 0.60%.
    LIFFE £500,000 three month sterling futures. £12.50 tick size.
    September 96.25
    December 96.60
    Futures contracts mature at the month end. LIBOR is currently 4%.
    FRA prices (%)
    4 v 5 3.85 – 3.80
    4 v 9 3.58 – 3.53
    5 v 9 3.50 – 3.45

    Answer
    FRA:
    The FRA fixed rate is 3.45%. Actual LIBOR is 3.5%. The company will therefore have to
    make a payment to the bank.

    This will be: £7.1m (3.50% – 3.45%) × 4/12 ×1/ (3.5% 4 /12)

    or £1,169.65

    I am not understanding the solution I just did this: £7.1m (3.50% – 3.45%) × 4/12= 1183

    February 18, 2016 at 5:24 pm #301057
    kellyanbatchu
    Member
    • Topics: 0
    • Replies: 5
    • ☆

    Why did they times the difference n by 1/(1+(3.5%*4/12))

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    Posts
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