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Hello Sir
In question 2 of the above stated exam paper, in part A, when calculating the underlying cost of borrowing, in the mark scheme, the floating rate has been used. The question dies not specify which rate to use so i went with the fixed rate. Is that wrong? Thank youIt would be wrong (although you would not lose all of the marks).
If they already know that they can borrow fixed at 5.5% on 1 February, then they would not be at risk and would not need to hedge (the risk we hedge against is the risk on interest rates changing between ‘now’ at the date the borrowing starts).
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