An American car manufacturer called Agnelli Inc. produces and sells variants of the Nuova 500 all over the world. In addition to selling various variants of this car, Agnelli Inc. also has a range of factories in a range of countries.

Given strong consolidation efforts in the car industry to benefit from economies of scale, Agnelli Inc. is seeking to expand by means of international acquisitions. For its international acquisitions, Agnelli Inc. is establishing contacts with potential takeover targets located in Billancourt, France and in Nishi-Ku Yokohama in Japan.

In order to actually expand, Agnelli Inc. will need additional financing. Agnelli Inc. considers raising funding in multiple currency regions. Next to financing in the US at an interest rate of 4.7%, the CFO of the Agnelli company suggests to finance any potential deal by obtaining funding from a combination of two currencies with 83% in Euro and the rest in Japanese Yen (17%).

The following information is provided regarding the interest rates and expected changes in spot rates in these currency regions. The probabilities of occuring can be treated as independent probabilities.

	Percent change in spot rate until end of loan	Probability of that spot rate occuring
Japanese Yen	1%	47%
Japanese Yen	3.6%	53%
Euro	3.3%	36%
Euro	4.2%	64%

In Japan the relevant interest rate equals 3.5% while in the Eurozone the relevant interest rate equals 4.4%.

1. Calculate the effective financing rate for each possible change in the spot rate separated by currency (in total four rates). Scenario Yen low (probability: 47%): _% Scenario Yen high (probability: 53%): _% Scenario Euro low (probability: 36%): _% Scenario Euro high (probability: 64%): _%

2. Calculate the expected effective financing rate for each currency (two rates). Currency Yen: _% Currency Euro: _%

3. Calculate the effective financing rate for each of the four scenarios implied by the low and high Yen, low and high Euro, and the weight of the currencies. Also report the four joint probabilities. Scenario 1: Low Yen, low Euro Joint probability: _% Effective Financing Rate: _% Scenario 2: Low Yen, high Euro Joint probability: _% Effective Financing Rate: _% Scenario 3: High Yen, low Euro Joint probability: _% Effective Financing Rate: _% Scenario 4: High Yen, high Euro Joint probability: _% Effective Financing Rate: _%

4. Calculate the expected effective finacing rate for the whole portfolio. _%

5. As the financing rate is lower/higher with the portfolio than using American funding, it makes sense/makes no sense to get funding via the currency portfolio. Yet, even if the rates would be the same, the portfolio has lower/higher uncertainty. The portfolio rate needs to be high/low sufficiently with a sufficiently low/high standard deviation to choose a portfolio of foreign funding.