A soft-drink manufacturer, Cloak, recently accepted a proposal for the expansion of their operations into logistics management.
Question:
A soft-drink manufacturer, Cloak, recently accepted a proposal for the expansion of their operations into logistics management. Cloak's board have determined that $20 million of debt will be required to partially fund the project. They plan to pay off this debt 3 months after they acquire it, which is when they expect cash to be released from an existing project. It is now 31 March and Cloak requires the funds in 4 months time. Cloak's management has been advised by market analysts that there is a 70% chance of interest rates increasing in the coming months and subsequently decides to take out an appropriate Forward Rate Agreement (FRA) for this future debt and its accompanying risk exposure. a)This FRA will be settled on: 31 March 31 July 31 October b)The contract period of the FRA is: 4 months 7 months 3 months c)The contract date of the FRA is: 31 March 31 July 31 October
Expert Answer:
a 31 July A FRA is a contract between two parties to exchange interest payments on a notional pri... View the full answer
