An Australian (domestic) firm would like to investigate whether it is cheaper to finance its borrowings via AUD (domestic currency) or EUR (foreign currency). You are provided with the following information: AUD interest rate = i = 5% = 0.05 EUR interest rate = i* = 8% = 0.08 Current Spot S(AUD/EUR) = 1.4500 AUD per EUR Forward 1-year F(AUD/EUR) = 1.4700 AUD per EUR The forward spread (calculated) = = over 1 The effective financing rate (via EUR) = =(1+)(1+)1 (i) Calculate the value of the forward spread, f. Keep your answer to 5 decimal places.

(ii) Calculate the effective financing rate (by borrowing EUR), e. Keep your answer to 2 decimal places in percentage terms.

(iii) Is the effective financing rate higher or lower than the domestic AUD interest rate? (iv) Use your answer in part (iii) to help you decide whether it is more desirable to borrow in AUD or EUR. Explain your decision.