CAF-7 · Chapter 10 · Question 4 of 15
A company entered into an FRA at 12.4% per annum to hedge its future cash DEPOSITS against falling interest rates. At the settlement date, the actual market KIBOR rate is 13.2% per annum. Who pays whom at settlement?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) The company pays the bank the interest difference
Explanation
The company locked in a guaranteed deposit rate of 12.4%. Because the actual market rate rose to 13.2%, the company 'loses' on the FRA (it is forced to accept 12.4% while the market offers 13.2%). Therefore, the company must pay the bank the difference.
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