ACCA Financial Management (F9) Certification Practice Exam

Which option gives the buyer the right to an agreed interest rate at a specified future time?

1. Interest rate swap

2. Interest rate futures

3. Interest rate options

4. Forward Rate Agreement (FRA)

The correct answer is: Interest rate options

The correct option is the one that provides the buyer the right to an agreed interest rate at a specified future time, which is characteristic of interest rate options. With an interest rate option, the buyer pays a premium for the right, but not the obligation, to enter into an interest rate transaction at a predetermined rate on a specific date in the future. This gives the buyer a valuable asset as they can benefit if the market interest rates move favorably. For example, if interest rates rise above the agreed rate, the buyer can exercise the option, effectively securing a lower rate than the market offers. Conversely, if rates fall, the buyer can choose not to exercise the option, thereby retaining more flexibility compared to other financial instruments. In contrast, other options do not give the same rights. An interest rate swap involves an exchange of interest payments based on agreed terms, but it does not provide a right—it is a commitment to swap rates. Interest rate futures are standardized contracts obligating the buyer to purchase a specific interest rate at a future date. A Forward Rate Agreement (FRA) also establishes a future interest rate but involves a binding agreement rather than an option. Thus, interest rate options are indeed the instrument that grants the buyer the right to the agreed