Page 15 - CIMA SCS Workbook August 2018 - Day 2 Suggested Solutions

CIMA AUGUST 2018 – STRATEGIC CASE STUDY

Another method that would give FNG greater flexibility would be to get an option on an FRA,
often referred to as an Interest Rate Guarantee (IRG). This could give FNG certainty over the
maximum rate they would pay, but giving them the option to benefit from a drop in interest rates
between now and the loan starting. It wouldn’t give them the variable rate they would like.

FNG could hedge using Interest Rate Futures, these are similar to FRAs but are not tailored to our
requirements, they are standardised contracts in terms of amounts and duration. As such would
not provide us with an exact hedge.

Another external hedge would be exchange traded interest options, which are like standardised
IRG, so would allow some flexibility, in terms of allowing us to let it lapse if rates move in our
favour. As with interest rate futures they are standardised amounts and durations, so would not
be an exact hedge.

The final option for FNG would be a swap; these are probably the most common form of interest
rate hedge used by companies as they can be used for long term borrowings. Although swaps can
be arranged through banks they can also be arranged with a counterparty who are either unable
to get the loan type they want or are looking to benefit from getting cheaper financing through
comparative advantage. Effectively we swap interest payments with a counterparty, as we would
like variable, but can only get fixed, we would swap with another party who wanted fixed but
either couldn’t get a fixed rate or were not happy with the fixed rates they could get.

Conclusion

The best option available to continue to have a balanced portfolio of debt appears to be a swap as
it is the only one that would allow us to continue with a variable rate.

Controls to reduce the threat of fake news

First of all, it is important to note that the threat of fake news is greatest for our online
publications and apps. The need for these to have up to date stories and regular content updates
reduces the time available to check facts and sources, greatly increasing the threat. Following on
from that the fake news threat is greatly reduced for weekly publications, as there is more time to
find leads, follow up on stories and verify they are true.

The tone within FNG will be key to reducing the overall threat both online and printed, if there is
an obvious pressure to hit financial targets this increase likelihood of fake news. Journalists would
feel under pressure to find sensational stories to encourage clicks on the FNG website or time on
the FNG app, this would help increase sales of advertising space. Making sure that FNG maintain a
focus on quality journalism with a clear and consistent message from the Board will be one of the
strongest controls available.

Publishing or not a fake news story appears to be something that FNG can control and we already
have procedures in place regarding the submission of a story. Segregation of duties with the
originating journalist to the “rewrite” journalist then to the news editor, all of these stages
represent a control for FNG. It requires at least three staff to verify/approve the story. If at any
point it doesn’t meet the criteria for example answering the six important questions, appears to
have inconsistencies or seems too sensational it could be prevented from reaching publication.

Following on from that regular training for staff, particularly journalists about the principles of
FNG, how to spot fake news stories and how to investigate or check the authenticity of a lead

74 KAPLAN PUBLISHING