ACCA Advanced Financial Management (AFM) - Platinum Super Revision Questions Pack - Sample - Sept/Dec 2024 Exam

Sep 17, 2026

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Platinum Super Revision Questions Pack (Sample) for ACCA Advanced Financial Management (AFM) focusing on exam-style interest rate risk management and hedging. The sample question covers a €22,000,000 European listed borrower (assumed 1 January 20x3) facing expected inflation and potential rate increases, and requires hedging strategies and evaluation using FRA, interest rate futures, options on futures, OTC IRG options, interest rate collars, and swap-based securitization. It also includes yield-curve based swap pricing and hedge outcome analysis with a quoted fixed rate and base-rate borrowing terms.

LanguageEnglish

CategoryExam

FormatPDF

Pages20

Reading Time50 min

AccessFree to download

Q1: Sunset Co - Interest rate risk management

Syllabus coverage and required hedging approaches

Answer section: FRA, futures, and interest rate options

Yield curve swap pricing and hedge outcome with fixed-rate borrowing

ACCA Advanced Financial Management (AFM) Platinum Super Revision Questions Pack (SAMPLE) Sept/Dec 2024 Exam © Lesco Group Limited and Steve Chen All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Lesco Group Limited and Steve Chen. Contents: Q1: Sunset Co- Interest rate risk management Syllabus coverage: • FRA (Forward rate agreement) • Interest rate futures • Interest rate options on futures • OTC interest rate options (Interest rate guarantee/IRG) • Interest rate collars • Asset securitization- Interest rate Swaps • Interest Rate Swaps pricing Question: Sunset Co, a large listed company based in Europe, is expecting to borrow €22,000,000 in four months’ time on 1 May 20x3. It expects to make a full repayment of the borrowed amount nine months from now. Assume it is 1 January 20x3 now. Currently there is some uncertainty in the markets, with higher than normal rates of inflation, but an expectation that the inflation level may soon come down. To manage interest ) . However, Sunset Co want to use external hedging techniques to hedge against the interest rate risks. The company can borrow at LIBOR plus 80 basis points and LIBOR is currently 3.3% . FRA: Bank has offered the following FRA rates: • 4-9: 3.9% -4.1% • 5-9: 3.8% -4.2% Futures: Three month value €25 The following information and quotes from an appropriate exchange are provided on Euro futuresand options. Margin requirements may be ignored. It can be assumed that settlement for both the futures and options contracts is at the end of the month. It contract maturity at a constant rate and that time intervals can be counted in months. • March 96.27 • June 96.16 • Options (Exchange): Options on three month €25. Option premiums are in annual % . OTC interest rate options (Interest rate guarantee/IRG) The interest rate agreed in the IRG agreement is 3.9%, the premium is €40,000 . Asset securitization-Swaps: Non- in Sunset to a special purpose vehicle. Here is the proposal detail: 1. assume that the leases will generate an income of 7% per annum over a ten-year period. The non-executive director predicts that there would be annual costs of €0.2 million in administering the loan. 2. which should be structured as follows: • 60% of the collateral value to support a tranche ofA-rated floating rate loan notes offering that there would be interest rate risks associated with the proposal, and proposes a fixed for variable interest rate swap on the A-rated floating rate notes, exchanging LIBOR for 3.8% . The bank fee to arrange the Swap is 0. 1% . • 15% of the collateral value to support a tranche of B-rated fixed rate loan notes offering investors 5% . • 15 rate loan notes offering investors 6% . • 10 certificates, with the return being the excess of receipts over payments from the securitisation process. Required: a. Suppose interest rate expects to rise by 0 .5%, suggest the hedging strategy for the €22,000,000 loan using: 1. FRA (Forward rate agreement) 2. Interest rate futures 3. Interest rate options on futures 4. OTC interest rate options (Interest rate guarantee/IRG) 5. Interest rate collars 6. Asset securitization- Interest rate Swaps b. Evaluate the above proposal. c. One of the Sunset Co’s subsidiaries obtains the yield curve in its country, and it also wants to perform the interest rate Swap, as it wants to pay fixed interest rate, but it currently pays LIBOR rate. Therefore, it needs to receive LIBOR rate and pay fixed rate per the Swap agreement. Here is the yield curve information: | Years | 1 | 2 | 3 | | --- | --- | --- | --- | | Annual Spot yield (Rate) | 5% | 6% | 7% | Required: For Interest Rate Swaps pricing, how much fixed rate that Suns

FAQs

What is the main hedging objective for Sunset Co in the sample AFM question?

Sunset Co wants to hedge the interest rate risk on a €22,000,000 loan they expect to borrow in four months and repay nine months later, using multiple hedging instruments and then evaluating the proposal.

Which instruments are required to suggest hedging strategies for the loan?

The question requires strategies using FRA, interest rate futures, interest rate options on futures, OTC interest rate options (Interest Rate Guarantee/IRG), interest rate collars, and asset securitization using interest rate swaps.

How is the fixed rate determined for the subsidiary’s interest rate swap using the yield curve?

Using the provided annual spot yields for years 1, 2, and 3, the subsidiary needs to compute the swap’s fixed rate payable each year under the swap pricing requirement stated in the question.

Sep 17, 2026

Uploaded by Terk