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In question a) when calculating the reduction in cost if hedging instruments are used, they are using the current cost of borrowing of 4.3% to compare with the results of hedging instruments.
My confusion is as to why is it using 4.3% for comparison because that rate is if Daikon were to borrow currently and not in 5 months time.Appreciate that the whole purpose of hedging is to use whatever instruments are available ‘today’ at ‘todays’ rates or prices, to hedge against changes that might happen in the future.
If we knew now what the interest rate was going to be in 5 months time then there would be no need to do any hedging, but the problem is obviously that as of ‘now’ we have no idea what the rate will be in 5 months time.
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