Outcomes of a 60-day Forward Rate Agreement in Australia
Calculate the expected outcome of a 60-day forward rate agreement entered into in Australia to hedge against the increase in interest rates on AUD 2,200,000.
The CEO is afraid interest rates will increase by 0.85% in Australia. The Australia subsidiary has a current short-term loan of AUD 2,200,000 that expires 60 days from now but will have to borrow the same amount again after expiry for operational expenses that will be incurred. Also, assume the settlement rate is the current risk-free rate plus 0.85%. Advise the CEO whether RedDot should take a long or short position to hedge the risk of the increasing interest rates.