E Co$,$ whose home currency is the dollar, wishes to borrow $12$ million for six months in

three months. The lending bank will fix the interest rate for the loan period at its prevailing

lending interest rate when the loan is taken out. The finance director of E Co believes this

lending interest rate could be a minimum of $35\%$ per year or a maximum of $55\%$ per year.

The uncertainty regarding the future interest rate is caused by the volatile state of the

economy and impending elections, which could lead to a change in political leadership

and direction. Interest on the euro loan would be payable at the end of the loan period.

The finance director of E Co would like to hedge the interest rate risk arising from the future

loan, and the company$$s bank has offered a $39,45\%35\%$ forward rate agreement.

The finance director is also concerned about the foreign currency risk associated with the

euro interest payment, due in nine months.

The following exchange rates are available:

Spot rate $($euro per $$1)1796418306$

Nine$-$month forward rate $($euro per $$1)1719117505$

$1.$ Evaluate the proposed forward rate agreement as a way of managing the

interest rate risk anticipated by E Co$.(3$ marks$)$