CIMA Financial Strategy F3 Question # 108 Topic 11 Discussion

CIMA Financial Strategy F3 Question # 108 Topic 11 Discussion

F3 Exam Topic 11 Question 108 Discussion:
Question #: 108
Topic #: 11

A company is considering hedging the interest rate risk on a 3-year floating rate borrowing linked to the 12-month risk-free rate.

If the 12-month risk-free rate for the next three years is 2%, 3% and 4%, which of the following alternatives would result in the lowest average finance cost for the company over the three years?


A.

Enter into an interest rate swap at 3.1% fixed against 12-month risk-free rate.


B.

Enter into an interest rate cap at an annual premium of 0.533% and a cap of 3%,


C.

Enter into a zero-cost collar with a floor of 2.9% and a ceiling of 4%.


D.

Do not hedge.


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