Question
McDougan Associates, a U.S.-based investment partnership, borrows 80,000,000 at a time when the exchange rate is $1.3460/. The entire principal is to be repaid in
McDougan Associates, a U.S.-based investment partnership, borrows 80,000,000 at a time when the exchange rate is $1.3460/. The entire principal is to be repaid in three years, and interest is 6.250% per annum, paid annually in euros. The euro is expected to depreciate vis vis the dollar at 3% per annum. What is the effective $ interest cost of this loan for McDougan?
Assumptions
Principal borrowed for three years, in euros
80,000,000
Interest rate on loan, percent per annum
6.250%
Beginning spot rate, $/euro
1.3460
Expected % change in the euro versus the dollar
-3.000%
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