Read the information below and choose the correct answer from each of the next 3 questions.

ARC Ltd is holding 10 semi-annual fixed coupon (10%) bond maturing in 36 months (face value = R1m). The next interest receipt is in exactly 180 days. ARC Ltd would like to hedge the interest rate exposure using interest rate swaps over the next 12 months. ARC Ltd can either enter into an agreement with the swap dealer as a fixed- rate payer at 11% in exchange for a floating-rate receipt of 180-day JIBAR + 1%, or as a floating-rate payer at 180-day JIBAR + 2% in exchange for 12% fixed-rate receipt on notional principal required. The 180-day JIBAR rates are forecasted as follows:

Current: 9%

In 180 days: 10%

In 360 days: 12%

What is ARC Ltd’s current exposure regarding the fixed coupon bond holding?

A. Exposure- decrease in the interest rates

B. Exposure – increase in interest rates

C. Exposure- no change in the interest rate

D. Exposure- increase in the future contract for tradable bonds

Based on the interest rates forecasted, compute the expected net receipts/payments (from the bond holding and the swap transaction) over the desired hedging period.

A. 180 days= R450 000 & 360 days = R500 000

B. 180 days= R400 000 & 365 days = R450 000

C. 180 days= R450 000 & 365 days = R500 000

D. 180 days= R650 000 & 360 days = R700 000

Would you advise ARC Ltd to go through the swap agreement based on the forecast?

A. Yes, accept.

B. No, reject.

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