Question

Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6 percent. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?

Answer 1

Answer:

The effective financing rate of borrowing yen is -25.8%

Explanation:

Amount borrowed in US = 2,000,00 * 0.005  = 10,000

amount paid back = 2,000,000 * 1.06 * 0.0035  = 7,420

effective cost of borrowing =  (1.06 * 0.0035/0.005) - 1 = -25.8%

Answer 2

Answer:

Explanation:

depreciation of the yen = 100( ( $ 0.0035 / $ 0.005) - 1 ) = - 30%

the effective rate of borrowing = ( 1 + 0.06) ( 1 + ( -30%)) - 1 = -0.258 × 100 = - 25.8 %