10. AireAsia. AireAsia, headquartered in Kunming, China, needs US$25,000,000 for
ID: 1229048 • Letter: 1
Question
10. AireAsia. AireAsia, headquartered in Kunming, China, needs US$25,000,000 for one year to finance working capital. The airline has two alternatives for borrowing:1) Borrow US$25,000,000 in Eurodollars in London at 7.250% per annum.
2) Borrow HK$39,000,000 in Hong Kong at 7.00% per annum, and exchange these Hong Kong dollars at the present exchange rate of HK$7.8/US$ for U.S. dollars.
At what ending exchange rate would AireAsia be indifferent between borrowing U.S. dollars and borrowing Hong Kong dollars?
Explanation / Answer
(a) If he borrow in Eurodollars that the amount of interest per annum = 25000000*7.25% = US$1812500 (b)If he borrow in Hongkong dollars that the amount of interest per annum = 39000000*7% = HK$2730000 The exchange rate at which AireAsia be indifferent between borrowing U.S. dollars and borrowing Hong Kong dollars is = 2730000/1812500 = 1.50621 answer Now if the same amount of HG$ is converted into the exchange rate of 1.50621, then he is paying the same in US$ terms = 2730000/1.56021 = US$1812500 Happy to help
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