What is the effective financing rate for a U. S. firm that takes out a one-year

This week you will learn to compute the cost of borrowing in foreign currencies. This is an important concept since the MNC uses a multitude of currencies to hedge and hopefully reduce their borrowing costs.

PROBLEM SETS
1. Assume the U.S. one-year interest rate is 8%, and the British one-year interest rate is 6%. The one-year forward rate of the pound is $1.97. The spot rate of the pound at the beginning of the year is $1.95. By the end of the year, the pound’s spot rate is $2.05, based on the information, what is the effective financing rate for a U. S. firm that takes out a one-year, uncovered British loan?

2. Assume Avarice 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 would be $_____________, and how many $ ___________would be needed to repay the loan?

3. Maston Corporation has forecasted the value of the Russian ruble for the next tear as follows:

OUTCOME

PERCENTAGE CHANGE PROBANILITY OF
-5% 20%
-3% 50%
1% 30%
If the Russian ruble borrowing rate is 30%, the expected cost of financing a one-year loan in rubles would be what?