Calculation of effective interest rate of foreign currency

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Reference no: EM1315191

Calculation of effective interest rate of foreign currency loan due to changes in exchange rates

Suppose we borrowed ¥1,000,000 at for 12 months at 1% and the spot price then was ¥128/$. At the maturity of the loan, the spot price was ¥120/$. What was the effective interest rate?

Suppose we $4,000,000 currently invested in the US with a return of 10%. We are considering two $1,000,000 mutually exclusive investments, one in the US and the other in the euro zone, each of which will return 12%. We will invest in one of the projects. The spot rate is €0.75/$, the interest rates are 5% in both the euro zone and the US, the standard deviations of the returns is 20% on the original ($4,000,000) investment, 45% on the proposed US investment and 40% on the proposed euro zone investment. The current investment has a 15% covariance with the US project, a 20% covariance with the euro zone project and the covariance between the new US and euro zone project is -30%. Compute the expected returns, the variance (or standard deviation), select the project that will maximize shareholder value and explain why the project that was chosen is appropriate.

Reference no: EM1315191

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