Section A

A corporate treasurer has entered into a '4 v 9' Forward Rate Agreement (FRA) to hedge against rising interest rates on a future borrowing.

What does the term '4 v 9' indicate regarding the timing of the FRA?

Answer options:

The agreement starts in 4 months and lasts for a duration of 9 months.

The agreement starts in 4 months and lasts for a duration of 5 months.

The agreement starts in 5 months and lasts for a duration of 4 months.

The agreement allows borrowing at 4% for up to 9 months.

How to approach this question

Understand FRA terminology. 'X v Y' means the FRA starts in X months and ends in Y months. The duration is Y - X.

Full Answer

B.The agreement starts in 4 months and lasts for a duration of 5 months.✓ Correct

In FRA terminology, '4 v 9' (read as 'four against nine') means the forward interest rate period begins in 4 months' time and ends in 9 months' time. The actual duration of the borrowing being hedged is the difference between the two, which is 5 months.

Common mistakes

Assuming the second number (9) is the duration of the loan.

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Practice the full ACCA FM — Financial Management Practice Exam 2

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