Page 225 - AFM Integrated Workbook STUDENT S18-J19

Hedging interest rate risk

Interest rate guarantees (IRGs)

3.1 Key features

 IRGS are options on FRAs.

 Treasurer has the choice whether to exercise or not.

 IRGs protect the company from adverse movements and allow it
take advantage of favourable movements.

 IRGs are more expensive than FRAs (pay a premium for the
flexibility).

Illustrations and further practice

Now try Illustration 3 and TYU 2 in Chapter 11

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