Section A

EuroRail Freight wishes to hedge against rising interest rates on a planned borrowing. The treasurer enters into a '4-v-7' Forward Rate Agreement (FRA).

What does the term '4-v-7' indicate regarding the timing of the FRA?

Answer options:

The borrowing will commence in 4 months' time and will last for a period of 7 months.

The borrowing will commence in 4 months' time and will last for a period of 3 months.

The borrowing will commence in 7 months' time and will last for a period of 4 months.

The company has 4 months to decide whether to borrow for a 7-month period.

How to approach this question

Understand the naming convention of FRAs. The first number is when the agreement starts (from today). The second number is when the agreement ends (from today). The difference between the two is the duration of the loan/deposit.

Full Answer

B.The borrowing will commence in 4 months' time and will last for a period of 3 months.✓ Correct

In FRA terminology, a '4-v-7' (or 4x7) FRA means the agreement starts in 4 months' time and ends in 7 months' time. Therefore, the underlying borrowing or deposit period lasts for 3 months (7 minus 4).

Common mistakes

Assuming the second number (7) represents the duration of the loan rather than the end date from today.

Question 12 All questions Question 14

Practice the full ACCA FM — Financial Management Practice Exam 5

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