Suppose that both the International Fisher Effect and Interest Rate Parity hold. Your firm needs to borrow the equivalent of $10,000,000. The rates at which you can borrow in various countries are: US: 7% UK: 5% Europe: 8% Japan: 3%

a. If you were not going to hedge your exchange rate risk, from where would you prefer to borrow and why?

b. If you were to hedge your exchange rate risk, from where would you prefer to borrow and why?