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The lecturer gave another answer later, and from what I understand, it is now assumed that the company borrowed in 2 months’ time (which is supposedly correct in concept) and, well, as no borrowing period was provided, just assume borrow till the next available futures price date (March). thus we can assume the company borrowed for 1.5 months!
Which is plain ridiculous as it contradicts the FRA calculation of borrowing for 2 months.
Anyway like you said, the word HAS indicates that the money has already been borrowed, which defeats the entire purpose of hedging.
Anyway for reference this was the original question:
Assume now is mid December.
The finance manager of a company, which is involved in the export and import of frozen food for distribution in the European Market, purchased equipment amounting to $30 million which is due in 2 months’ time. In order to finance the purchase, the company has borrowed $30 million from the capital market. There is a rumour that the central bank will increase the interest rates in the near future. The finance manager is concerned with the risk exposure.
(The rest of the question provided the company’s borrowing rates, 3 months sterling futures for Dec, Mar, June; 3 month options for the following 3 months as well, and FRA prices as mentioned above in my earlier comment).
Required:
Illustrate how the interest rate risk might be hedged against if interest rate increases by 0.5%.Thank you! All I needed was an experienced tutor like you to confirm that it was a weird question. From now onwards I will refer to your lectures to understand and learn better.
@feti7a said:
What is the role of a finance team member in change management?I wrote about how a change management would probably change the project scope and constraints, i. e. Cost requirements etc and so a financial team member had to be consulted before implementing changes regarding finance allocation for the project. Not sure if correct tho.
