Question: Question 4 Engmann Inc. is expected to borrow GHS 25 million in three months' time on 1 August. It is expected to make full payment

Question 4 Engmann Inc. is expected to borrow GHS 25 million in three months' time on 1 August. It is expected to make full payment of the loan principal in 6 months' time. The firm can borrow at Base Rate plus 120 basis points and Base Rate is currently 25%. Interest rate has been fluctuating in the economy in recent times, and so Management of Engmann Inc. fear that interest rate might rise by the time the loan would be taken. The firm signs a forward rate agreement (FRA) deal with Kharila Bank to protect its interest rate risk exposure. FRA rate is set at 28% on the spot date. Required: (a) Discuss the advantages of hedging interest rate risk with a forward rate agreement as against interest rate futures. (4 Marks) (b) Suppose the Base Rate settles at 24% on 1 August, evaluate the outcome of the hedge. Marks) (c) Briefly explain the meaning of economic risk' and distinguish it from transaction risk. (4 Marks) (8 (d) A UK company is planning to build and operate a factory in Ghana Required: Discuss the potential political risks that may arise and recommend risk mitigation strategies that could be implemented to bring these risks to a satisfactory level. (9 Marks)

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