McDougan Associates, a U.S.-based investment partnership, borrows 75,000,000 at a time when the exchange rate is $1.3366/. The entire principal is to be repaid in three years, and interest is 6.450% perannum, paid annually in euros. The euro is expected to depreciate vis--vis the dollar at 2.6% per annum. What is the effective cost of this loan for McDougan?

		Year 0		Year 1		Year 2		Year 3
Proceeds from borrowing euros		75,000,000
Interest payment due in euros				(4,837,500)		(4,837,500)		(4,837,500)
Repayment of principal in year 3								(75,000,000)
Total cash flow of euro-denominated debt		75,000,000		(4,837,500)		(4,837,500)		79,837,500
Expected exchange rate, $/		1.3366		1.3018		1.2680		1.2350
Dollar equivalent of euro-denominated cash flow	$	100,245,000	$	(6,297,692)	$	(6,133,952)	$	(98,601,894)

What is the effective cost of this loan for McDougan?