Task 2 QMNNJOO On 1 April 2023 Padd borrowed 8.5 million over a four-year period at...

 

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Task 2 QMNNJOO On 1 April 2023 Padd borrowed £8.5 million over a four-year period at LIBOR + 1% pa to finance an expansion of its production capacity and the refurbishment of a number of its stores. Padd's board is now investigating whether it should hedge against adverse interest rate movements over the next 12 months. Its bank has offered either (a) an option at 4% pa plus an option premium of 0.75% of the sum borrowed or (b) a Forward Rate Agreement (FRA) at 4.5% pa. Requirements: 1.1. Calculate Padd's sterling receipt from the sale to DS if it: (a) Does not hedge the receipt and the Indian rupee weakens by 1% by 30 June 2024 (b) Uses an OTC currency option (c) Uses a forward contract (d) Uses a money market hedge [14 marks] 1.2. With reference to your calculations above, advise Padd's board whether it is worth hedging the DS receipt. [11 marks] 1.3. Advise Padd's board as to the risks, other than currency risk, that should be considered if the company is to continue to trade abroad in future. [6 marks] 1.4. By preparing suitable interest payment calculations, recommend to Padd's board whether it is worth hedging against interest rate movements over the next 12 months if LIBOR is either (a) 3% pa or (b) 6% pa. [9 marks] Task 2 QMNNJOO On 1 April 2023 Padd borrowed £8.5 million over a four-year period at LIBOR + 1% pa to finance an expansion of its production capacity and the refurbishment of a number of its stores. Padd's board is now investigating whether it should hedge against adverse interest rate movements over the next 12 months. Its bank has offered either (a) an option at 4% pa plus an option premium of 0.75% of the sum borrowed or (b) a Forward Rate Agreement (FRA) at 4.5% pa. Requirements: 1.1. Calculate Padd's sterling receipt from the sale to DS if it: (a) Does not hedge the receipt and the Indian rupee weakens by 1% by 30 June 2024 (b) Uses an OTC currency option (c) Uses a forward contract (d) Uses a money market hedge [14 marks] 1.2. With reference to your calculations above, advise Padd's board whether it is worth hedging the DS receipt. [11 marks] 1.3. Advise Padd's board as to the risks, other than currency risk, that should be considered if the company is to continue to trade abroad in future. [6 marks] 1.4. By preparing suitable interest payment calculations, recommend to Padd's board whether it is worth hedging against interest rate movements over the next 12 months if LIBOR is either (a) 3% pa or (b) 6% pa. [9 marks]

Answer rating: 100% (QA)

11 a If Padd does not hedge the receipt and the Indian rupee weakens by 1 by 30 June 2024 Padds sterling receipt would be Receipt 85 million x 1 LIBOR x 1 001 85 million x 1 004 x 099 85 million x 104 ... View the full answer