Financing with a portfolio. Pfeffer GmbH (Germany)

considers obtaining 40% of its one-year financing in Canadian dollars and 60% in Japanese yen. The forecasts of appreciation in the Canadian dollar and Japanese yen for the next year are as follows:

The interest rate on the Canadian dollar is 9%, and the interest rate on the Japanese yen is 7%. Develop the possible effective financing rates of the overall portfolio and the probability of each possibility based on the use of joint probabilities (assume independence).

Transcribed Image Text:

Currency Possible percentage change in the spot rate over the loan life Probability of that percentage change in the spot rate occurring Canadian dollar 4% 70% Canadian dollar 7 30 Japanese yen 6 50 Japanese yen 9 50