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Effective Financing Rate of Canadian Dollar and Swiss Franc

Hi, I need some help with these two questions:
1. The annual interest rate on the Canadian dollar is 9%. The forecast of the Canadian dollar's value for the next year is shown below. Calculate the effective financing rate for a U.S. company. Show how you derive the answer.

Percentage Change Probability
1.0% 15%
-1.5% 30%
-2.0% 55%

2.The annual interest rate on the Swiss franc is 4%. It is expected to appreciate 3% over the next year. Calculate the effective financing rate for a U.S. company. Show how you derive the answer.

Solution Preview

Please see the attached file:

1. The annual interest rate on the Canadian dollar is 9%. The forecast of the Canadian dollar's value for the next year is shown below. Calculate the effective financing rate for a U.S. company. Show how you derive the answer.

Percentage Change Probability Percentage Change x Probability
1.00% 15% 0.1500% =1.% x 15.%
-1.50% 30% -0.4500% =-1.5% x 30.%
-2.00% 55% -1.1000% =-2.% x 55.%
100% -1.4000%

Therefore the estimated change in Canadian dollar = -1.4000%

(1+Effective interest rate) =(1+ Canadian dollar interest rate) x (1+ change in spot rate of Canadian dollar)
or Effective interest rate ={(1+ Canadian dollar interest rate) x (1+ change in spot rate of Canadian ...

Solution Summary

This in-depth solution calculates the effective interest rate on borrowing in a foreign currency with step-by-step workings and all calculations shown in excel file attached.

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