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Chapter 14

3.2 Interest rate guarantees (IRGs)

An IRG is an option on an FRA. It allows the company a period of time during which
it has the option to buy an FRA at a set price.

 Adverse movements – exercise the option – company is protected

 Favourable movements – let the option lapse – company takes advantage

IRGs are more expensive than FRAs due to their flexibility.

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