XL Ltd, an Australian company, plans to borrow 10 million Australian dollars (AUD), in three months' time for a period of six months. The company has asked Mr Adam Reid, an independent financial treasurer, to advise the Board on how the company should manage its interest rate risk. Following his investigation of the company's needs, Mr Reid presented to the Board the following two methods below: Method 1: An interest-rate guarantee in AUD; Method 2: A collar OTC interest rate option. The following information is available. Interest rate guarantee A guarantee at 15.75% is available at a premium of 0.25% of the amount to be borrowed. Collar A collar, with a ceiling exercise price of 15.9% and a floor of 14%, is available at a premium of 0.1% of the amount to be borrowed. Further information: The current base rate in Australia is 14%. XL Ltd can borrow in Australia at base plus 0.5%.

Required: Evaluate the effects of the two alternative hedging strategies presented by Mr Reid to the Board, if:

(i) Interest rates in Australia increase in three months time to a base rate of 16%; [6 marks]

(ii) Interest rates in Australia decrease in three months time to a base rate of 13%. [6 marks]