ACCA · Question 08 · Risk Management
Section A
CryptoVault Exchange is concerned that interest rates on its fiat currency borrowings will rise over the next six months. The treasury team is deciding between a Forward Rate Agreement (FRA) and an Interest Rate Guarantee (IRG).
Which of the following statements is true regarding these hedging instruments?
Answer options:
An FRA requires the payment of an upfront premium, whereas an IRG does not.
An IRG protects against adverse interest rate movements while allowing the company to benefit from favorable movements, whereas an FRA fixes the rate entirely.
Both FRAs and IRGs are traded on standardized futures exchanges.
An FRA allows the borrower to abandon the contract if interest rates fall, whereas an IRG is a binding commitment.
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