Amber run a small company. She is a little worried about what will happen after Brexit because many of your workers come from Western Europe. If they are not allowed to come to the UK, she will have to employ British workers who are more expensive. She decides that she wants to build a little financial slack into her financial position by borrowing 100,000. She can always borrow this amount twelve months from now but she is worried about what interest rates will be then.

She went to the bank who offers you two choices. One, she can borrow from the bank right now. The bank will charge her 11% per annum if she borrow today and that rate is fixed for the next twelve months. Or two, she can borrow gold at 2% per annum. If gold is borrowed, interest must be repaid in gold (by buying gold in the open market) in twelve months. The risk-free interest rate is 9.25% per annum, and storage costs are 0.5% per annum. The gold price is 1400 per ounce.

Which is a better choice and why? The interest rates on the two loans are expressed with annual compounding (compounded once a year). The risk-free interest rate and storage costs are expressed with continuous compounding.