When a firm borrows in a foreign currency, the effective cost is the foreign interest rate plus an adjustment for changes in the exchange rate.

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When a firm borrows in a foreign currency, the effective cost is calculated as the foreign interest rate plus an adjustment for changes in the exchange rate. This is because any change in the exchange rate will affect the repayment value of the loan in the firm's home currency. Therefore, the effective cost of borrowing in a foreign currency includes both the foreign interest rate and the impact of currency fluctuations.

When a Firm Borrows in a Foreign Currency, the Effective