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# Expected effective financing rate

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A U.S. firm plans to borrow Swiss francs today for a one year period. The Swiss interest rate is 9%. It uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S. one year interest rate is 10%. The expected effective financing rate on Swiss francs is:
A) equal to the U.S. interest rate.
B) less than the U.S. interest rate, but more than the Swiss interest rate.
C) equal to the Swiss interest rate.
D) less than the Swiss interest rate.
E) more than the U.S. interest rate.

Assume the U.S. interest rate is 7.5%, the New Zealand interest rate is 6.5%, the spot rate of the NZ\$ is \$.52, and the one year forward rate of the NZ\$ is \$.50. At the end of the year, the spot rate is \$.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one year, uncovered NZ\$ loan?

#### Solution Preview

A U.S. firm plans to borrow Swiss francs today for a one year period. The Swiss interest rate is 9%. It uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S. one year interest rate is 10%. The expected effective financing rate on Swiss francs is:
A) equal to the U.S. interest rate.
B) less than the U.S. interest rate, but more than the Swiss interest rate.
C) equal to the Swiss interest rate.
D) less than the Swiss interest rate.
E) more than ...

#### Solution Summary

Anwers to 2 multiple choice questions on expected effective financing rate.

\$2.19