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Cost of borrowing French francs for the year

12. Suppose that on January 1, the cost of borrowing French francs for the year is 18%. During the year, U.S. inflation is 5%, and French inflation is 9%. At the same time, the exchange rate changes from FF 1 = $0.15 on January 1 to FF 1 = $0.10 on December 31. What was the real U.S. dollar cost of borrowing francs for the year?

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ANSWER. During the year, the franc devalued by (.15 - .10)/.15 = 33.33%. The nominal dollar cost of borrowing French francs, therefore, was ...

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$2.19