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The question provided the following info:
– Now is Mid December.
– The Manager purchased $30m worth of equipment, which is due in 2 months time.
-In order to finance it, $30m was borrowed from the capital market.
-LIBOR is currently 6% per annum and the company can borrow at LIBOR + 0.9%.-Three month dollar future is provided for:
December 93.870
March 93.790
June. 93.680-Options on three month dollar future is also provided for:
Dec, Mar & June.-FRA Prices were given as follows, for:
3 v 6 7.01-6.91
3 v 5 7.08-7.00
3 v 8 7.28-7.20Required:
Illustrate how the int rate risk might be hedged against if the int rate increases by 0.5%.My questions are:
1. With the only info above available, is it possible to determine how many months will the company take to fully repay its debt? (in order to determine which FRA to use)2. If the $30m is due in 2 months time, how do I perform calculation for the FRA based on the above information?
Sorry for the lengthy question, as this was a question set by my university lecturer but no student can answer it correctly.
Sorry, but we do not give answers to test questions!
You should be using a Revision Kit from one of the ACCA approved publishers – they contain answers together with explanations, and if there is anything in the answer that you are not clear about then certainly I will help you.
Why not ask your lecturer for the answer (and then ask here if there is anything in the answer that you do not understand).
The knowledge needed for this is all covered in my free lectures (the lectures are a complete free course for Paper P4).
In addition the chances of being asked about FRA’s in this way at P4 are actually pretty small. P4 questions on interest rate risk are much more concerned about the use of interest rate futures and interest rate options (which, again, are covered in detail in my free lectures 🙂 )
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