What are the projected usd gbp rate and usd eur rate

Reference no: EM13897736

GBA Company wishes to raise $5,000,000 with debt financing. The funds will be repaid with in- terest in 1 year. The treasurer of GBA Company is considering three sources:

i. Borrow USD from Citibank at 1.50%

ii. Borrow EUR from Deutsche Bank at 3.00%

iii. Borrow GBP from Barclays at 4.00%

If the company borrows in euros or British pounds, it will not cover the foreign exchange risk; that is, it will change foreign currency for dollars at today's spot rate and buy foreign currency back 1 year later at the spot rate prevailing then. The GBA Company has no operations in Europe.

A representative of GBA contacts a local aca- demic to provide projections of the spot rates 1 year in the future. The academic comes up with the following table:

Projected Rate 1 Currency Spot Rate Year in the Future

USD> GBP 1.50 1.55
USD> EUR 0.95 0.85

a. What is the expected interest rate cost for the loans in EUR and GBP?

b. What are the projected USD > GBP rate and USD> EUR rate for which the expected interest costs would be the same for the three loans?

c. Should the country borrow in the currency with the lowest interest rate cost? Why or why not? Would your answer change if GBA did generate cash flows in the United Kingdom and continental Europe?

Reference no: EM13897736

Questions Cloud

How can central bank discounting cause procyclical movements : How can central bank discounting cause procyclical movements in the money supply? How can the central bank eliminate such a movement? Discuss.

Is the given bond necessarily a great deal for the investors : Given the "fat" coupon, is this bond necessarily a great deal for the investors? At maturity, in August 1990, the exchange rate was actually JPY144 > USD. Was the bond a good deal for investors?

Kinematic relationships between the crank and the yoke : Create a video of your real scotch yoke moving, and show the computer-generated animation side-by-side or overlayed in the same video.

What tools available central bank for control money supply : What are the tools available to the central bank for controlling the money supply? Discuss how manipulation of each of these tools will change the money supply and how reliable each tool is likely to be.

What are the projected usd gbp rate and usd eur rate : What are the projected USD > GBP rate and USD> EUR rate for which the expected interest costs would be the same for the three loans?

How much time will be needed to gather the data : Suggest a plan to test your hypothesis (initial or revised). What data will you study? How and where will you gather it? What equipment or resources will be needed? How much time will be needed to gather the data

Describe organizational security considerations : Describe organizational security considerations in an Internetworking environment

What is lender-of-last-resort function of the central bank : What is the lender-of-last-resort function of the central bank in modern economies? What is its justi?cation? Should commercial bank borrowing from the central bank be a privilege or a right? Discuss.

Is it obvious which security the treasurer should pick : Is it obvious which security the Treasurer should pick? Suppose the Treasurer believes that the 1-year LIBOR rate 1 year from now will rise to 4.50%.

User Account

All Pages