rart Granger plc (Granger) is highly geared and is keen to manage its exposure to interest rate risk. A large portion of the company's borrowings is floating rate debt at LIBOR + 3% and Granger is considering hedging the interest rate to minimise risk. Granger's bank has offered the following hedging options: A forward rate agreement (FRA) at 4% interest A cap at 4% interest. There will be a premium cost of 1% per year for the cap. The bank is prepared to buy a floor from Granger at 3.85% interest for a premium of 0.75% per annum. Assume that LIBOR is currently 0.75% but is expected to move to 1.25% shortly. Required Calculate, for BOTH the current and exp Granger will pay under each of the following: the current and expected LIBOR rates, the effective interest rate that (1) No hedge, (ii) FRA, (iii) Cap and (iv) Collar Recommend which hedging method, if any, Granger should use assuming that LIBOR moves to 1.25%. 1