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OZEN Forward rate agreement with Bank-ZQ: determine cost of loan in two cases

(ii) OZEN Inc plans to borrow £6 million in 180 days. The loan will be taken out at the appropriate LIBOR rate on the day the loan commence and will be repaid in full 90 days later. OZEN Inc would like to lock in the rate it pays by entering into a forward rate agreement with Bank-ZQ. Bank-ZQ agrees to lock in a rate of 11 percent.

Determine the annualised cost of the loan for each of the following outcomes, assuming interest is based on 90 days and a 365 day year:
(a) LIBOR in 180 days is 15 percent.
(b) LIBOR in 180 days is 9 percent.

Solution Summary

In the attachment, the solution presents the calculations, the conclusions and explanations for the answers.