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Determining the expected effective financing rate

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Boca Inc. needs $4 million for one year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank because the Japanese interest rate is three percentage points lower than the US rate. Assume that interest rate parity exists; also assume that Boca believes that the one-year forward rate of Japanese yen will exceed the future spot rate one year from now. Will the expected effective financing rate be higher, lower, or the same as financing with dollars? Explain.

Reference no: EM132641902

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