Part (b) required candidates to use derivative products (futures, options and collars) to hedge interest rate risk. Generally this part was done adequately by many candidates, especially when assessing futures and options, but only a few candidates employed collars properly. In some cases, hedging using collars was ignored completely. A number of candidates found it difficult to calculate the number of contracts and the basis.

A few candidates got confused between basis and basis risk, and incorrectly assumed that because the question referred to no basis risk, this meant that there was no basis. This is a fundamental error and should not really occur at this level.  It was frustrating, given that there was a recent article in the Student Accountant on interest rate hedging, that there were still a significant number of poor responses when employing futures and options.