14. You are the treasurer for Telecom Argentina (TA), an Argentine telecommunications company, and seek to borrow 20,000,000 Argentine pesos (ARS) for 1 year. The firm is able to borrow in US dollars (USD) from Citibank in New York or in ARS from Banco De La Nacion Argentina. If TA borrows USD, the firm will convert the borrowed USD to ARS at the spot rate prevailing now; and when TA repays the loan, the firm will convert ARS to USD at the spot rate prevailing in 1 year. (That is, assume a forward market does not exist in the ARS.) You face the following spot exchange rate and interest rates: Spot exchange rate (now): USD loan rate with Citibank: ARS loan rate with Banco De La Nacion: USD money market (risk-free) rate ARS 17.50 per USD 7.00% 13.00% 1.00% Part I: Assume Uncovered Interest Rate Parity (UIRP) holds and the ARS risk-free rate is 8.00%. a. Estimate the exchange rate in 1 year between the ARS and the USD. b. How many USD would the firm need to borrow now from Citibank so that the firm would be able to convert to 20,000,000 ARS? c. In 1 year, how many USD (total repayment, principal and interest) would the Citibank loan require the firm to repay? d. In 1 year, how many ARS (total repayment principal and interest) would the firm need to convert to repay the USD Citibank loan? e. What is the implied annual interest rate paid in ARS terms for the Citibank loan. f. From which bank should TA borrow? 14. You are the treasurer for Telecom Argentina (TA), an Argentine telecommunications company, and seek to borrow 20,000,000 Argentine pesos (ARS) for 1 year. The firm is able to borrow in US dollars (USD) from Citibank in New York or in ARS from Banco De La Nacion Argentina. If TA borrows USD, the firm will convert the borrowed USD to ARS at the spot rate prevailing now; and when TA repays the loan, the firm will convert ARS to USD at the spot rate prevailing in 1 year. (That is, assume a forward market does not exist in the ARS.) You face the following spot exchange rate and interest rates: Spot exchange rate (now): USD loan rate with Citibank: ARS loan rate with Banco De La Nacion: USD money market (risk-free) rate ARS 17.50 per USD 7.00% 13.00% 1.00% Part I: Assume Uncovered Interest Rate Parity (UIRP) holds and the ARS risk-free rate is 8.00%. a. Estimate the exchange rate in 1 year between the ARS and the USD. b. How many USD would the firm need to borrow now from Citibank so that the firm would be able to convert to 20,000,000 ARS? c. In 1 year, how many USD (total repayment, principal and interest) would the Citibank loan require the firm to repay? d. In 1 year, how many ARS (total repayment principal and interest) would the firm need to convert to repay the USD Citibank loan? e. What is the implied annual interest rate paid in ARS terms for the Citibank loan. f. From which bank should TA borrow
