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Spread rates in FRAs

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Spread rates in FRAs

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • September 9, 2021 at 3:39 pm #635140
    Annora
    Member
    • Topics: 7
    • Replies: 5
    • ☆

    I am confused when I saw “6-9 FRA 2.8%-3.1%” in the question, which rate should I use for the calculation and what the spread means here?

    Thank you in advance

    September 10, 2021 at 8:04 am #635238
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    In depends whether in the question they are depositing money or borrowing money. The lower rate is the rate on depositing and the higher rate is the rate on borrowing.

    This is all explained in my free lectures on the management of interest rate risk.

    September 10, 2021 at 8:17 am #635251
    Annora
    Member
    • Topics: 7
    • Replies: 5
    • ☆

    Hi Sir, thank you for explaining

    But in BPP Mock examination 4, question 4

    KEW Co is planning an investment of $10 million for a six-month period starting in three months’ time. KEW Co is worried about interest rates falling and hedges the risk using an appropriate FRA as follows:
    6-9 FRA 2.80%-3.10%
    3-9 FRA 3.00%-3.20%

    Assume that in three month’s time, interest rates are 3.50%.

    The company is about to invest, shouldn’t they borrow the money from the bank?
    /////////

    I think I understand now, the company is worried about interest rates falling, only when they intend to deposit money, they will worry about the decreasing interest rate.

    September 11, 2021 at 8:17 am #635483
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    Correct – they are not borrowing but are investing 🙂

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    Posts
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