The company is expanding its operations. To finance the expansion, the company plans to take...
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The company is expanding its operations. To finance the expansion, the company plans to take out a loan of 75 million in 180 days. Due to other operational uncertainties, the company wants to reduce the interest rate risk associated with the loan. The company enters into a forward rate agreement with the bank. The term of the agreement is 180 days (same as the loan) and the forward rate is 3.70%. If the realized market interest rate at the time of borrowing is 2.80% or 4.50%, in both situations, calculate the interest rate paid by the company on the loan, the result of the forward contract, and the annual cost of the loan. The rate is based on 360 days a year.
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