Question

Assume the U.S. one-year interest rate is 8 percent, and the British one-year interest rate is 6 percent. The one-year forward rate of the pound is $1.97. The spot rate of the pound at the beginning of the year is $1.95. By the end of the year, the pound's spot rate is $2.05. Based on the information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered British loan?a. about 12.4 percentb. about 7.1 percentc. about 10.3 percentd. about 11.4 percent

Answer 1

Answer:

d. about 11.4 percent

Explanation:

% change in pound = ($2.05 - $1.95)/$1.95

                                 = 5.1%

Effective financing rate = (1 + 6%)(1 + 5.1%) - 1

                                       = 11.4%

Therefore, The effective financing rate for a U.S. firm that takes out a one-year, uncovered British loan is about 11.4 percent.