A Japanese firm is considering whether to borrow money in USD or JPY for 9 months. The current interest rate on USD-loan is 4.00% pa, while JPY-loan is 3.00% pa. The current exchange rate between USD and JPY is 100.0000/$ and the firm expects USD to depreciate to 98.8654/$ at the end of 9 months.

Q-1 If the objective is to borrow at the lowest interest rate, which currency should the firm borrow?

Q-2. What is the main drawback of using minimum expected cost of borrowing as the main objective for choosing between loans denominated in different currencies?