Question
Assume that on January 1, a Mexican firm wants to finance their Mexican operation and borrows $10 million for 1 year with 8% annualized interest
Assume that on January 1, a Mexican firm wants to finance their Mexican operation and borrows $10 million for 1 year with 8% annualized interest from a US bank. At inception, the spot rate was Peso 3.40/$. The inflation is 2.00% and 12.00% respectively for US and Mexico. According to our class material, PPP between Mexican Peso and USD hold well. Thus, what is the actual cost to the firm of the loan, since the firm has to pay back USD?
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Contemporary Financial Management
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow
10th Edition
978-0324289114, 0324289111
