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Company SAS has obtained SAR 100,000,000 loan at the price of SIBOR+3.00% for 5years. The company's management is concerned about a potential increase in the
Company SAS has obtained SAR 100,000,000 loan at the price of SIBOR+3.00% for 5years. The company's management is concerned about a potential increase in the interest rate. Hence, it has been decided to consider using suitable OTC derivative instruments to hedge against the interest rate risk. The current market levels are as follows: 3-Year Interest Rate Swap: 2.5% 5-Year Interest Rate Swap:3.0% 3-Year Interest rate Cap Strike: 2.5% (Premium = SAR 500,000) 5-Year Interest rate Cap Strike: 3.0% (Premium = SAR 750,000) Considering the above, answer the following questions: A. What shall the company do if it decides to completely fix the interest cost regardless of the future interest rate paths and movements? Please indicate the overall All in interest cost in your answer Do the A B. What shall the company do if it decides to fix the interest cost but also takes advantage of the market if it goes lower subsequently? Please indicate the overall All in interest cost in your Do the A
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