You are the Treasurer of Rindl plc, a large industrial group. You have been reviewing the rolling cash flow forecast produced by your assistant, which has identified a shortterm deficit of 12m arising on the 1st September 2X21. A large stage payment from a customer is expected to be received on the 30th November 2X21, which will eliminate the shortfall. It is now the 1st June 2X21. You will be able to drawdown on your Revolving Credit Facility to cover the borrowing. Interest on this loan would be fixed at the date of drawdown at the annual rate of LIBOR + 250 basis points. LIBOR is currently 0.6%, but you are concerned that interest rates might rise before the borrowing is required and wish to protect the company from this risk. Your assistant has provided a list of quotes for Forward Rate Agreements from one of your group banks, but is unsure as to which one is relevant. The rates are: FRA Rate 3 v 9 3.15 - 3.05 3 v 6 3.18 - 3.06 3 v 3 3.16 - 3.04 3 v 2 3.13 - 3.03 You advise your assistant, which FRA is relevant, and enter into the agreement with the bank. BIRMINGHAM CITY UNIVERSITY FORMAL EXAMINATION ACC7046 - Financial Strategy Page 11 of 18 Required: (a) Identify the appropriate FRA to use in this situation and the applicable rate. (2 marks) (b) On the 1st September, LIBOR is 0.85%. By entering into the FRA, how much have you saved the company when compared to leaving the borrowing unhedged? (4 marks) (c) Explain the features of an Interest Rate Guarantee and explain in what circumstances the Treasurer might have chosen to use such an instrument to hedge the above risk, (4 marks) (d) The yield curve is normally upward sloping. Explain, by reference to the relevant theory, why this might be expected to be the case and briefly explain how the treasurer can use the yield curve when taking borrowing and investing decisions. (10 marks)