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interest rate fra

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › interest rate fra

  • This topic has 4 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • February 20, 2022 at 12:00 pm #648968
    Frooti
    Participant
    • Topics: 92
    • Replies: 83
    • ☆☆

    Question: current spot is 3.5% , basis is 0.6% . If curent spot falls by 0.5% what will be it’s impact on FRA?

    The FRA fixed rate is 3.45%. Actual SONIA 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)x (1/(1+(3.5%x4/12))

    or £1,169.65
    This will be deducted from the actual receipts of £97,033 (estimated above) to give a
    net £95,863.

    I have not understood the calculation above in fra pls tell

    February 20, 2022 at 7:12 pm #648992
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You have not typed out the whole question because I have no idea where the 7.1M or the 4/12 (and SONIA is not a standard term so I do not know what it refers to).

    Assuming that it is a past exam question please tell me the name and date of the question, because I have all past questions.

    February 21, 2022 at 2:57 am #649014
    Frooti
    Participant
    • Topics: 92
    • Replies: 83
    • ☆☆

    Question is interest rate hedges june 5

    February 21, 2022 at 4:11 am #649020
    Frooti
    Participant
    • Topics: 92
    • Replies: 83
    • ☆☆

    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 SONIA + 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. SONIA 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
    Required:

    (c) If SONIA fell by 0.5% during the next five months, show the expected outcomes of
    each hedge in the cash market, futures market and FRA market as appropriate.
    (6 marks)

    February 21, 2022 at 9:50 am #649053
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    By June 5 do you mean the June 2015 exam or the June 2005 exam or what?

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