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(20 points) GBA Company wishes to raise $5,000,000 with debt financing. The treasurer of GBA Company is considering three sources: i. Borrow USD from Citibank
(20 points) GBA Company wishes to raise $5,000,000 with debt financing. The treasurer of GBA Company is considering three sources: i. Borrow USD from Citibank at 1.50% p.a. to be repaid with interest in 1 year. ii. Borrow EUR from Deutsche Bank at 3.00% p.a. to be repaid with interest in 1 year. iii.Borrow GBP from Barclays at 4.00% p.a., but with two interest payments, one at the end of 6 months and the other at the end of 1 year. If the company borrows in euros or British pounds, it will not cover the foreign exchange risk; that is, it will change foreign currency for dollars at today's spot rate and buy foreign currency later at the spot rate prevailing then. The GBA Company has no operations in Europe. A representative of GBA contacts a local academic to provide projections of the spot rates in the future. The academic uses the random walk model, where the forecast of future values of the exchange rate equals today's spot value. Currency Today's Spot Rate USD/GBP USD/EUR 1.35 1.10 a. (10 points) What is the expected interest rate cost for the loan in EUR? What is the projected USD/EUR rate for which the expected interest costs in USD and EUR are the same? (1+0.03)
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