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Compute the effective financing rate

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A U.S. firm forecasts the euro's value as follows for the next year:

Percentage Change- 3% 10%

Probability of Occurrence

2% 55%

4% 35%

The annual interest rate on the euro is 7 percent.

(1) Compute the effective financing rate for a 1-year loan from the perspective of the U.S. firm.

(2) Will the effective financing rate be higher or lower if the euro interest rate changes to 7.%? Explain.

Reference no: EM132953404

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