(7) (a) Provide an Interest Rate Swap. Future and Option numerical example and explain your results in detail. (6 Marks) Morson Plc has a 4.4% cost of capital and recently took out a 3-year $18.5 million debenture loan from New York on a LIBOR floating rate basis. However, it now believes that LIBOR is likely to increase and so they are considering whether to take out a Forward Rate Agreement (FRA) with the Liverpool Victoria Insurance Company as a form of hedge, costing $1.25m payable at the beginning of the first year. According to the proposed agreement, the Liverpool Victoria Insurance Company would pay Morson 92% of the difference between Morson's initial interest cost and any increase in interest costs caused by a rise in LIBOR. Conversely. Morson would pay the Liverpool Victoria Insurance Company the difference between its initial interest cost at LIBOR + 1.75% (where LIBOR is currently at 1.25%) and any fall in interest cost due to a fall in LIBOR at the end of each year. Required: (b) Determine whether you would recommend that Morson should purchase the FRA by showing a 3 year forecast for a protentional increase and decrease in LIBOR by 25 basis points. (13 Marks) (c) Differentiate in detail between a FRA and an Interest Rate Future that could be used to hedge interest rate exposure for Morson. (6 Marks) (7) (a) Provide an Interest Rate Swap. Future and Option numerical example and explain your results in detail. (6 Marks) Morson Plc has a 4.4% cost of capital and recently took out a 3-year $18.5 million debenture loan from New York on a LIBOR floating rate basis. However, it now believes that LIBOR is likely to increase and so they are considering whether to take out a Forward Rate Agreement (FRA) with the Liverpool Victoria Insurance Company as a form of hedge, costing $1.25m payable at the beginning of the first year. According to the proposed agreement, the Liverpool Victoria Insurance Company would pay Morson 92% of the difference between Morson's initial interest cost and any increase in interest costs caused by a rise in LIBOR. Conversely. Morson would pay the Liverpool Victoria Insurance Company the difference between its initial interest cost at LIBOR + 1.75% (where LIBOR is currently at 1.25%) and any fall in interest cost due to a fall in LIBOR at the end of each year. Required: (b) Determine whether you would recommend that Morson should purchase the FRA by showing a 3 year forecast for a protentional increase and decrease in LIBOR by 25 basis points. (13 Marks) (c) Differentiate in detail between a FRA and an Interest Rate Future that could be used to hedge interest rate exposure for Morson. (6 Marks)