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Option vs Swaps

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Option vs Swaps

  • This topic has 3 replies, 2 voices, and was last updated 11 months ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • February 13, 2022 at 4:32 pm #648559
    Mahrukh
    Member
    • Topics: 26
    • Replies: 38
    • ☆☆

    Hello John,
    In S/D 20, Q3 part b, it says that “The traded options available may last for a short period, perhaps up to two years, less maybe than the period of the loan. Swaps
    can be arranged for a much longer period.” From what I’ve learned options have a standard maturity of 3 months and swaps have this benefit over options as they can be arranged for longer durations whereas option contracts need adjustment. Then why it says that traded options may last upto 2 years?

    February 14, 2022 at 7:19 am #648579
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51582
    • ☆☆☆☆☆

    The examiner did later correct himself and state that using options would effectively mean keep selling and reinvesting if it was for more than 3 months.

    February 16, 2022 at 5:36 am #648688
    Mahrukh
    Member
    • Topics: 26
    • Replies: 38
    • ☆☆

    Although the loan is for 3 years, we don’t need to hold options for that duration because what we’re actually hedging is the fluctuation of interest rate from now to the date we’ll take out the loan like after 4 months. So why we need to keep selling and reinvesting, when can just adjust the number of option contracts for the longer duration of loan??

    February 16, 2022 at 10:08 am #648710
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51582
    • ☆☆☆☆☆

    What you have written is true if the borrowing was fixed interest borrowing. However it is not fixed interest and the risk is that the interest rate will changed during the period of the loan.

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