Zanussi, the Italian manufacturer of household appliances, is exporting dishwashers to France and extending 180 days credit to the French wholesale importer. The exports proceeds are denominated in French francs (FF) and are worth FFI20,OOO,OOO.

To fmance its working capital, Zanussi is investigating sever~ borrowing sources: Banco di Roma would flnance the deal at an annual interest rate of 16%;

Credit Lyonnais, a leading French commercial bank, would extend a loan at an annual rate of only 12 % . Forward francs are selling at a premium of 5 % (on an annual basis vis-a-vis the Italian lira). The Eurodollar market could fmance the loan at an annual rate of 10%. Finally, forward dollars are selling at a six-month premium of 1.5%vis-a-vis the French franc (SFF.$(O) = 4.97).
Formulate algebraically and numerically the lira cost of each financing option, and indicate the optimal financing strategy for the Italian manufacturer.
Explain how the fact that both the French franc and Italian lira belong to the European Monetary System should influence the fmancing decision.