Part (a) looked at hedging an investment that was going to be made in a few months’ time using interest rate FRAs, futures and options. Responses to this part of the question were mixed. Some responses were able to demonstrate hedging using the three products and making a sensible and considered recommendation albeit with numerical errors.

Other responses made more fundamental errors like going short in futures, purchasing put options or choosing the incorrect contract month (June instead of March), and therefore limiting the number of marks that were awarded. Few responses were able to calculate the basis correctly. A number of responses chose the incorrect FRA rate.

The discussion of the outcomes tended to be general, as opposed to specifically relating to the scenario, and therefore the recommendation tended to be general as well. At this level it is important for candidates to recognise that contextualised discussion and conclusion will result in higher marks.

The presentation quality of the responses tended to be mixed. Some candidates’ answers were presented well, while others were presented in a haphazard way without any coherent flow. This made it very difficult for markers to award marks.

This approach taken by some candidates was surprising given that there were recent articles in the Student Accountant on risk management and given that the learning providers’ manuals provide approaches to answering these types of questions in significant detail.