Swimming Seals Ltd is a company based in Trinidad and Tobago, with customers and suppliers in various

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Question:

Swimming Seals Ltd is a company based in Trinidad and Tobago, with customers and suppliers in various Caribbean countries. The company's accounts for financial reporting purposes are managed in Trinidad and Tobago (TT) dollars, however all foreign currency transactions are denominated in United States Dollars (USD).

Loan taken from Barbados bank

Swimming Seals Ltd expects that interest rates will fall over the next year and has a $300,000 USD loan with a bank in Barbados, at an interest rate of 9% per annum, interest payable annually and redemption in 6 years' time. The interest payment for the current year is due in 6 months' time.

Receivable from customer in British Virgin Islands (BVI)

There is currently a receivable of $75,000 USD from a credit customer in BVI in 4 months' time.

Required:

a) Evaluate the risk faced by Swimming Seals Ltd on its USD-denominated interest payment in six months' time and advise how this risk might be hedged.

b) Evaluate whether a money market hedge or a forward market hedge would be preferred on financial grounds for the receivable

c) Briefly explain the nature of a forward rate agreement and discuss how a company can use a forward rate agreement to manage interest rate risk.

d) Identify and discuss the different kinds of interest rate risk faced by Swimming Seals Ltd.