Question
Suppose that on January 1st, the annual costs of borrowing in Swiss Franc and US dollars are 3% and 4% respectively. The spot rate of
Suppose that on January 1st, the annual costs of borrowing in Swiss Franc and US dollars are 3% and 4% respectively. The spot rate of USD on January 1st is USD/CHF1.0078 per USD. One year forward rate was quoted as USD/CHF0.9950.
A) ABC Corp is evaluating borrowing options in USD and CHF. Compare the dollar cost of borrowing in both currencies. What would be your recommendation to ABC Corp Treasurer?
B) suppose your consulting work sparked the idea of taking advantage of what you have seen. Assuming that you have a credit line of $1,000,000 or equivalent CHF, can you generate arbitrage profits?
Step by Step Solution
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Step: 1
A To compare the dollar cost of borrowing in both currencies we need to calculate the effective annual interest rates in each currency and then conver...
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International financial management
Authors: Jeff Madura
12th edition
1133947832, 978-1305195011, 978-1133947837
