Question

80. Assume that the euro is expected to appreciate by 4% annually against the U.S. dollar. If a U.S. company can borrow dollars for 9.3%, and is trying to minimize its expected financing cost, what is the highest interest rate it should be willing to pay to borrow euros?

a. 8.9%

b. 7.2%

c. 4.3%

d. 5.096%

e. None of the above

81. Assume that the euro is expected to depreciate 4% annually against the U.S. dollar. If a U.S. company can borrow dollars for 9.3%, and is trying to minimize its expected financing cost, what is the highest interest rate it should be willing to pay to borrow euros?

a. 5.09%

b. 13.3%

c. 13.85%

d. 5.3%

e. None of the above

Answer 1

using fisher equation

(1 + nominal return) = (1+ inflation rate) * (1+real rate)

=>

80)

interest rate = (1+0.093)/(1+0.04) - 1

= 5.096%

choose d)

81)

interest rate = (1+0.093)/(1-0.04) - 1

= 13.85%

choose c)