Chapter 14 - Interest rate risk

A forward rate agreement is:
1. An agreement to borrow in the future at a fixed rate from a lender
2. A contract that covers an increase in interest charges
3. A contract so that the company gains if interest rates go down
4. A contract to pay or receive the difference between a fixed rate and the borrowing rate at a particular point in the future
Which of the following would NOT be a sensible use of a FRA by a manufacturer?
1. Covering changes in interest rates when the company is committed to borrow for commercial reasons
2. Offsetting trading losses due to changes in interest rates
3. Speculating on a hunch that interest rates will change
4. Offsetting changes in floating interest rates
The main advantage of an interest rate guarantee over a forward rate agreement is:
1. It allows a company to benefit from a favourable change in interest rates
2. It is cheaper
3. It is easier to arrange
4. It fixes an interest rate
The value of a three month tick on a single IRF contract of £500,000 would be:
1. £12.50
2. £125.00
3. £1,250.00
4. £125,000
You have taken out a FRA on a £20m, one year loan at 5%. At the time the loan was taken out the market interest rate was 5.75%. The effect of this is:
1. Nothing
2. You pay £25,000
3. You receive £25,000
4. You receive £150,000
You wish to hedge against rising interest rates on a floating rate loan. To do this you:
1. Take out a further loan
2. Sell IRFs
3. Buy IRFs
4. Buy and sell IRFs
Company P can borrow at 8% fixed or LIBOR plus 1.5%. Company Q can borrow at 10% fixed or LIBOR plus 2.5% This means that:
1. P should borrow on Q's behalf
2. There is no scope for any gains
3. There is an advantage in P borrowing fixed and Q borrowing floating
4. There is an advantage in Q borrowing fixed and P borrowing floating
The efficiency of a hedge is:
1. To do with the time it takes to set up
2. A measure of the cost setting up the hedge against the benefit
3. Better in times of economic stability
4. How closely the hedging instrument moves opposite to the movement in the hedged item
A variation margin is:
1. An extra charge to cover rising interest rates
2. An amount deposited by a party to an option contract against anticipated losses
3. The difference between the value of an option and an underlying asset
4. A recognition of future gains
Which of the following is not an advantage of interest rate swaps:
1. They are flexible
2. They have low transaction costs
3. They carry no risks
4. They are readily arranged through banks

Chapter 14 - Interest rate risk

Quiz