ABC Inc.has to borrow money to undertake a seasonal business expansion in six months time.They will need additional working capital funding for six months and wish to hedge themselves against a rise in interest rates in six month's time.They should

Question

Quizplus · Accepted Answer

Taking a long position in a 6x12 FRA would be the best choice in this scenario. With this strategy, ABC Inc. would lock in a fixed interest rate for borrowing the additional working capital funding in six months, and protect itself against any potential rise in interest rates. This would provide certainty and allow ABC Inc. to plan and budget accordingly. A short position in a 6x12 FRA would have the opposite effect, exposing ABC Inc. to potential increases in interest rates. Lending and borrowing at spot rates today or waiting six months would not provide the necessary certainty and protection against interest rate risk.

ABC IncHas to Borrow Money to Undertake a Seasonal Business Expansion