Agnelli Motors. Agnelli Motors of Italy recently took out a four-year 65 million loan on a floating rate basis. It is now worried, however, about rising interest costs. Although it had initially believed interest rates in the Eurozone would be trending downward when taking out the loan, recent economic indicators show growing inflationary pressures. Analysts are predict- ing that the European Central Bank will slow mone- tary growth driving interest rates up. Agnelli is now considering whether to seek some protection against a rise in euro-LIBOR, and is con- sidering a Forward Rate Agreement (FRA) with an insurance company. According to the agreement, Agnelli would pay to the insurance company at the end of each year the difference between its initial interest cost at LIBOR + 2.50% (6.50%) and any fall in interest cost due to a fall in LIBOR. Conversely, the insurance company would pay to Agnelli 70% of the difference between Agnelli's initial interest cost and any increase in interest costs caused by a rise in LIBOR. Purchase of the floating Rate Agreement will cost E100,000, paid at the time of the initial loan. What are Agnelli's annual financing costs now if LIBOR rises and if LIBOR falls? Agnelli uses 12% as its weighted average cost of capital. Do you recommend that Agnelli purchase the FRA