Pacific Brands has established a $5 million 90-day bank bill rollover facility with ANZ Bank.

Posted: January 10th, 2022

Pacific Brands has established a $5 million 90-day bank bill rollover facility with ANZ Bank. The company is concerned that interest rates may rise at the next rollover date. The company decides to manage this risk exposure with a forward rate agreement (FRA) with ANZ. The bank gives the following quote: 3Mv6M(21) 6.15–05. The reference rate is the Australian BBSW. Note: At the first rollover date BBSW is published as 6.10 per cent per annum.

(a) Explain each of the components of the above FRA quote.

(b) Draw and fully label an FRA timeline to show the structure of the above FRA agreement.

(c) In the above scenario the agreed rate will be 6.15 per cent per annum. The reference rate in three months is 6.10 per cent per annum. Who will be required to make the compensation payment?

(d) Has this been a successful risk management strategy for Pacific Brands? (LO 18.4)