Thank you.

Botany Bay Corporation (BBC) of Australia seeks to borrow $1,000,000 in the Eurodollar market. Funding is needed for three years. Investigations leads to three possibilities or strategies as follows: Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. Based on the above information, choosing strategy #2 will: guarantee the lowest average annual rate over the next three years. eliminate credit risk, but retain repricing risk. maintain the possibility of lower interest costs but maximizes the combined credit and repricing risks. o preclude the possibility of sharing in lower interest rates over the three-year period. o