Fosmay limited is a wholly owned Ghanaian company that manufactures roofing sheets. The company exports to a number of west african coutries including Ngeria, Togo and Benin. As a result of an increase in both local and international demand for its products, the company has decided to expand its production facilities at en estimated cost of GH¢51 milion . The company intends to borrow this amount in three months time to for a term of six months . The previaling inerest rates is 28.5% but the company expect this to rise to about 35.5% in three months time.
Unibank Ghana Limited the bankers of the Fosmay Limited is guarateeing an interest rate of 30.5% in three months for a period of six months. The company has therefore decided to enter into a Forward Rate Agreement with Unibankn Ghana Limited and all the necessary agreements have been signed by both parties.
Required:
a) What is forward rate agreement and why has Fosmay Limited signed this agreement
b) Expalin what will ahppen if interest rates rise to 35.5% in three months
c) Explain what will happen if interest rate fall to 26.5% in three months
d) Outline two merits and demerits of using a forward rare agreement.