May 2017 Q5 a.

The Board of Directors of Aduana Enterprise has approved an expansion project which will require cash inflow of GH¢10 million. The investment duration will be 6 months and management is considering taking a fixed interest rate loan from its bankers. The loan will be required in three months from the date of board’s approval.
Management of Aduana is considering hedging its risk exposure using a Forward Rate Agreement (FRA). The 3-9 months’ FRA rate at the transaction date was 5%.
Required:
If the spot rate at the settlement date is 8%, calculate the present value of the following
i) Settlement value                                                          (3 marks)

ii) Loan amount required                                                (2 marks)

iii) Interest on loan                                                          (2 marks)

iv) Effective interest rate                                                 (3 marks)