Global Electronics (GE), a Jamaican Firm wishes to raise $51,000,000 with debt financing. The funds will be repaid with interest in 1 year. The treasurer of GE is considering three sources:

i. Borrow USD from Citibank at 1.50%

ii. Borrow EUR from Deutsche Bank at 3.00%

iii. Borrow GBP from Barclays at 4.00%

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 todays spot rate and buy foreign currency back 1 year later at the spot rate prevailing then. GE has no cash flows outside USD. A representative of GE contacts you as a student of finance to assist with the following projections:

1. What is the expected interest rate cost for the loans in EUR and GBP?

2. What are the projected USD/GBP rate and USD/EUR rate for which the expected interest costs would be the same for the three loans?

Currency Spot Rate Projected Rate 1 Year in the Future 1.55 USD/GBP 1.5 USD/EUR 0.95 0.85 Answer parts A and B below