Forward Rate Agreement – NBC Institute

SCS – Nov 2024 – L3 – Q4c – Forward Rate Agreement for Interest Rate Risk Management

Calculation of settlement amount for FRA under different Ghana Reference Rate (GRR) scenarios.

Question

The company has decided to use a Forward Rate Agreement (FRA) to manage its interest rate risk likely to arise from the short-term loan of GH¢15 million it intends to borrow in three months for a period of six months.

Required:

i) What is the purpose for a company to enter into an FRA arrangement? (2 marks)

ii) Calculate the amount of money that will be paid to settle the FRA at the beginning of the FRA period if, at the end of month 3, when the FRA becomes effective, the six-month Ghana Reference Rate (GRR) is as follows:

a) 37.50%
b) 28.50%

In each case, clearly state the party (i.e. FRA buyer or FRA seller) responsible for making the payment.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial management, Forward Rate Agreement, Hedging, Interest Rate Risk, Risk Mitigation, Short-Term Borrowing
Level: Level 3

Topic: International financial management
Series: Nov 2024

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

Question

Katangwa Limited will need to borrow ₦50 million in three months’ time for a period of six months. The company is concerned that interest rates are expected to rise over the next few months.

Interest rates and forward rate agreements (FRAs) are currently quoted as follows:

Spot 5.75 – 5.50
3 – 6 FRA 5.82 – 5.59
3 – 9 FRA 5.94 – 5.64

Required:

a. Explain how a forward rate agreement (FRA) may be useful to the company. Illustrate this on the basis that interest rates: i. Rise to 6.50% ii. Fall to 4.50%

(8 Marks)

b. Compare the use of interest rate futures with FRA in this instance. (4 Marks)

c. Explain how interest rate guarantees or a short-term interest rate cap could be used. (3 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial risk management, Forward Rate Agreement, Interest Rate Futures, Interest Rate Risk, Short-term Interest Rate Cap
Level: Level 3

Topic: Financial Risk Management
Series: MAY 2018

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

Question

The Board of Directors of Aduana Enterprise has approved an expansion project which will require a cash inflow of GH¢10 million. The investment duration will be 6 months, and management is considering taking a fixed interest rate loan from its bankers. The loan will be required in three months from the date of board’s approval.

Management of Aduana is considering hedging its risk exposure using a Forward Rate Agreement (FRA). The 3-9 months’ FRA rate at the transaction date was 5%.

Required:
If the spot rate at the settlement date is 8%, calculate the following:
i) Settlement value (3 marks)
ii) Loan amount required (2 marks)
iii) Interest on the loan (2 marks)
iv) Effective interest rate (3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Forward Rate Agreement, FRA, Interest calculation, Interest rate hedging, Loan management
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: MAY 2017

SCS – Nov 2024 – L3 – Q4c – Forward Rate Agreement for Interest Rate Risk Management

Calculation of settlement amount for FRA under different Ghana Reference Rate (GRR) scenarios.

Question

Required:

i) What is the purpose for a company to enter into an FRA arrangement? (2 marks)

a) 37.50%
b) 28.50%

In each case, clearly state the party (i.e. FRA buyer or FRA seller) responsible for making the payment.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial management, Forward Rate Agreement, Hedging, Interest Rate Risk, Risk Mitigation, Short-Term Borrowing
Level: Level 3

Topic: International financial management
Series: Nov 2024

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

Question

Katangwa Limited will need to borrow ₦50 million in three months’ time for a period of six months. The company is concerned that interest rates are expected to rise over the next few months.

Interest rates and forward rate agreements (FRAs) are currently quoted as follows:

Spot 5.75 – 5.50
3 – 6 FRA 5.82 – 5.59
3 – 9 FRA 5.94 – 5.64

Required:

a. Explain how a forward rate agreement (FRA) may be useful to the company. Illustrate this on the basis that interest rates: i. Rise to 6.50% ii. Fall to 4.50%

(8 Marks)

b. Compare the use of interest rate futures with FRA in this instance. (4 Marks)

c. Explain how interest rate guarantees or a short-term interest rate cap could be used. (3 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial risk management, Forward Rate Agreement, Interest Rate Futures, Interest Rate Risk, Short-term Interest Rate Cap
Level: Level 3

Topic: Financial Risk Management
Series: MAY 2018

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

Question

Management of Aduana is considering hedging its risk exposure using a Forward Rate Agreement (FRA). The 3-9 months’ FRA rate at the transaction date was 5%.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Forward Rate Agreement, FRA, Interest calculation, Interest rate hedging, Loan management
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: MAY 2017

Question Tag: Forward Rate Agreement

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SCS – Nov 2024 – L3 – Q4c – Forward Rate Agreement for Interest Rate Risk Management

Calculation of settlement amount for FRA under different Ghana Reference Rate (GRR) scenarios.

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

SCS – Nov 2024 – L3 – Q4c – Forward Rate Agreement for Interest Rate Risk Management

Calculation of settlement amount for FRA under different Ghana Reference Rate (GRR) scenarios.

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

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SCS – Nov 2024 – L3 – Q4c – Forward Rate Agreement for Interest Rate Risk Management

Calculation of settlement amount for FRA under different Ghana Reference Rate (GRR) scenarios.

You're reporting an error for "SCS – Nov 2024 – L3 – Q4c – Forward Rate Agreement for Interest Rate Risk Management"

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

You're reporting an error for "FM – May 2018 – L3 – SC – Q5 – Financial Risk Management"

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

You're reporting an error for "AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques"

SCS – Nov 2024 – L3 – Q4c – Forward Rate Agreement for Interest Rate Risk Management

Calculation of settlement amount for FRA under different Ghana Reference Rate (GRR) scenarios.

You're reporting an error for "SCS – Nov 2024 – L3 – Q4c – Forward Rate Agreement for Interest Rate Risk Management"

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

You're reporting an error for "FM – May 2018 – L3 – SC – Q5 – Financial Risk Management"

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

You're reporting an error for "AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques"

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