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A firm forecasts the euro’s value as follows for the next year:                                &nbs

A firm forecasts the euro’s value as follows for the next year:

                                                Possible

                                         Percentage Change                                    Probability

                                                  -0.02                                                         10%

                                                   0.03                                                         50%

                                                   0.03                                                        40%

      The annual interest rate on euro is 7%. The expected value of the effective financing rate from a U.S. firm’s perspective is about:

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Answer #1

The effective financing rate is calculated as interest rate multiplied by expected value of change.

Possible percentage change Probability Expected value -0.02 0.1 -0.002 0.03 0.5 0.015 0.03 0.4 0.012 Sum 0.025 so the expecte

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