Question
It is now 31 December 2017 and the corporate treasurer of Omnitown plc is concerned about the volatility of interest rates. His company needs in
It is now 31 December 2017 and the corporate treasurer of Omnitown plc is concerned about the volatility of interest rates.
His company needs in three months' time to borrow £5 million for a six month period. Current interest rates are 14% per year for the type of loan Omnitown would use, and the treasurer does not wish to pay more than this.
He is considering Using:
(i) A forward rate agreement (FRA); or
(ii) Interest rate futures; or
(iii) An interest rate guarantee (short-term cap).
You are required to explain briefly how each of these three alternatives might be useful to Omnitown plc for hedging Interest rate risk?
Step by Step Solution
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Step: 1
i Forward Rate Agreement FRA A FRA is a contract between two parties where one party agrees to pay a ...
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Corporate Finance and Investment decisions and strategies
Authors: Richard Pike, Bill Neale, Philip Linsley
8th edition
1292064064, 978-1292064161, 1292064161, 978-1292064062
