1 Analysis of Short term Financing Jacksonville Corp is a US based firm that needs $500 000 It has no business in Japan but is considering oneyear financing with Japanese yen because the annual interest rate would be 5 percent versus 9 percent in the United States Assume that interest rate parity exists Can Jacksonville benefit from borrowing Japanese yen and simultaneously purchasing yen one year forward to avoid exchange rate risk ? Explain If Jacksonville borrows yen and simultaneously purchases yen one year forward , it will pay a forward premium that will offset the interest rate differential ( given that interest rate parity Exists ) . Based on interest rate parity , the forward premium is about 3 890 . The effective financing rate would be ( 1 + 596 ) ( 1 + 3. 896 ) - 1 = about 90% Assume that Jacksonville does not cover its exposure and uses the forward rate to forecast the future spot rate . Determine the expected effective financing rate . Should Jacksonville finance with Japanese yen ? Explain