Question: Question 1: (10 Marks) The CEO is afraid interest rates will decrease by 1% in the United Kingdom and become a negative rate. Calculate

Question 1: (10 Marks) The CEO is afraid interest rates will decrease

Question 1: (10 Marks) The CEO is afraid interest rates will decrease by 1% in the United Kingdom and become a negative rate. Calculate the expected outcome of a forward rate agreement entered into in the United Kingdom for an existing short term investment of 1,000,000 of the subsidiary that expires 90 days from now, since the amount will be reinvested for another 3 months. The current risk free United Kingdom rate is to be used for the calculation as the agreed rate. Also assume the current risk free rate is the settlement rate that decreased by 1% compared to the agreed rate. Also advise him whether HighTech should take a long or short position to hedge the risk of the decreasing interest rates. Notional amount: Agreed rate (90 day forward) Settlement rate: Number of days: Show the figures that should be applied in this column Marks 1 mark 1 mark 1 mark 1 mark Show your calculation here by applying the correct formula: (2 marks) Do you recommend that HighTech should be the seller or buyer of the forward rate agreement? (1 mark)

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