Question

Assume Blackstone Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $_______, and $_______ is needed to repay the loan.

	375,000; 449,400
	449,000; 375,000
	6,000,000; 5,357,143
	5,357,143; 6,000,000

Answer 1

Initial Loan = 1.5 million MYR and Initial Exchange Rate (Exchange Rate when loan is extended) = $ 0.25

$ Equivalent Value of Loan Extended = 0.25 x 1500000 = $ 375000

Nominal Interest Rate = 7%

Repayment Obligation on original MYR borrowing = Original Borrowing + Interest Expense = 1500000 + 0.07 x 1500000 = MYR 1605000

Exchange Rate 1-Year later (at the time of loan repayment) = $ 0.28

Therefore, Loan Repayment Obligation in $ = 1605000 x 0.28 = $ 449400

Hence, the correct option is (a)