It is now the 1^st of November 2021. Enfield Inc's financial projections show an expected cash deficit in two months’ time of $8m, which will last for approximately three months. The treasurer is concerned that interest rates may rise before the 1st January 20X7. Protection is thus required for two months.

The treasurer can lock into an interest rate today for a future loan.

The company takes out a loan as normal, i.e. the rate it pays is the going market rate at the date the loan is taken out.

It will then receive or pay compensation under the separate forward rate agreement to return to the locked-in rate.

Suppose a 2 v 5 FRA at 5.00 - 4.70 is agreed.

The agreement starts in 2 months' time and ends in 5 months' time.

The FRA is quoted as interest rates for borrowing and lending - the borrowing rate is always the highest.

Calculate the interest payable if in two months' time if the market rate is: (a) 7% or (b) 4%.

Answer rating: 100% (QA)

In this situation the company is secured from an interest rate increase but not fr... View the full answer