Assume that the Swiss franc has an annual interest rate of 8 per cent and is expected to depreciate by 6 per cent against the pound. From a UK perspective, the effective financing rate from borrowing francs is:
A) 8%.
B) 14.48%.
C) -2%.
D) 1.52%.

Question

Quizplus · Accepted Answer

The effective financing rate is calculated by adjusting the interest rate for the expected depreciation. The formula is: Effective Rate = (1 + Interest Rate) * (1 + Depreciation Rate) - 1. Here, it is (1 + 0.08) * (1 - 0.06) - 1 = 1.08 * 0.94 - 1 = 1.0152 - 1 = 0.0152 or 1.52%.

Assume That the Swiss Franc Has an Annual Interest Rate