Question

Denim Industries can borrow its needed financing for expansion using one of two foreign lending facilities. It can borrow at a nominal annual interest rate of 12​% in Mexican pesos or it can borrow at 5​% in Canadian dollars. If the peso is expected to depreciate by 10.57​% and the Canadian dollar is expected to appreciate by 3​%, which loan has the lower effective annual interest​ rate?

Question .

1)The effective annual interest rate of the loan in Mexican pesos is?

Answer 1

E = N + F + (N * F)

Equation 19.1 can be used to calculate the effective interest rate for a specific currency (E), given the nominal interest rate for the currency (N) and its forecast percentage change (F):

For Mexican pesos:

E = 12% + (-10.57%) + (12% x -10.57%)

E = 0.16%

For Canadian Dollar:

E = 5% + 3% + (5% x 3%)

E = 8.15%