$CP$ Bhd is a Malaysian telecommunication company with a strong global presence.

The Company had been expanding aggressively in order to capitalise on the low

broadband and wireless penetration rates in many developing countries in Asia and

Africa. However, its expansion via foreign direct investment had exposed the

Company to foreign exchange risks, interest rate risks and global political risks. CP

Bhd had obtained a $4-$year $6$ million loan on a floating rate basis as the Company

had initially believed interest rates in the Euro$-$zone would be trending downwards due

to the prolonged European Debt crisis. Recent economic data has pointed to a faster

than anticipated recovery in the EU countries and analysts are predicting that the

European Central Bank will slow monetary growth by increasing interest rates.

As the financial controller of CP Bhd$,$ you are now considering whether to seek some

protection against a rise in euro$-$LIBOR. Your banker has suggested that the Company

enter into a Forward Rate Agreement $($FRA$).$ According to the terms of the FRA, CP

Bhd would pay to the bank at the end of each year the difference between its initial

interest cost at LIBOR $+2\mathrm{.}50\%($equivalent to $7\mathrm{.}50\%)$ and any fall in interest cost due

to a fall in LIBOR. Conversely, the bank would pay to CP Bhd$,70\%$ of the difference

between the Company's initial interest cost and any increase in interest costs caused

by a rise in LIBOR. Purchase of the Floating Rate Agreement will cost $100,000$ and

the Company uses $12\%$ as its weighted average cost of capital.

Required:

a$)$ Determine whether the Forward Rate Agreement suggested by the banker would

be beneficial to CP Bhd$.$ by showing all calculations.

$(15$ marks$)$

b$)$ Critically discuss any SIX $(6)$ possible strategies that CP Bhd may adopt to release

any blocked funds in both the countries.

$(15$ marks$)$