On a particular day, an American company, Company A, borrows euro-denominated fu

Question

On a particular day, an American company, Company A, borrows euro-denominated funds for one year at 1%. In comparison, a similarly rated U.S. company, Company B, borrows a dollar loan with the same maturity at 2.5%. The exchange rate on the borrowing date is $1.1199/€. Assume that the international Fisher effect holds true. What is the expected effective cost of debt in dollars (in percentage) for Company A?

Your answer: ______________%

(Keep two decimals; Do include the “-” if your answer is a loss.)

Explanation / Answer

Current exchange rate 1.1199 Expected exchange rate 1.1479 (1.1199*1.025) eg: Loan borrowed A $1,000.00 exchange rate 1.1199 In euro $892.94 Interest in euro $8.93 today interes in $ $7.78 (8.93/1.1479) Effective cost of debt 0.78% (7.78/1000)

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