- 10 Marks
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)
Find Related Questions by Tags, levels, etc.
- Tags: Forward Rate Agreement, FRA, Interest calculation, Interest rate hedging, Loan management
- Level: Level 3