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    Effective Financing Rate of Canadian Dollar and Swiss Franc

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    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.

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    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.

    $2.19