Ignore interest rate parity for the sake of problem

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The firm needs to borrow $100,000 dollars. Ignore interest rate parity for the sake of this problem. The firm can borrow in U.S. at 4% compounded annually, or the firm can borrow Yen at 3% compounded annually. The spot exchange rate is 108 Yen per dollar and the bank offers a one-year forward rate of 109 Yen per dollar. Both loans require repayment of the principal and interest at year end. Borrowing in which country is cheaper? How many dollars does the cheaper alternative save at year end (when compared to the alternative)?

Reference no: EM131180432

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