Assume the euro interest rate is 7.5 per cent, the New Zealand interest rate is 6.5 per cent, the spot rate of the NZ$ is 0.28 euro, and the one-year forward rate of the NZ$ is 0.25 euro. At the end of the year, the spot rate is £0.23 euro. Based on this information, what is the effective financing rate for a euro firm that takes out a one-year, uncovered NZ$ loan?

Question

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The effective financing rate is calculated by considering the interest rate differential and the change in exchange rates. The euro firm borrows in NZ$ at 6.5% and the NZ$ depreciates from 0.28 to 0.23 euro, resulting in a loss due to currency depreciation. The effective financing rate is negative, approximately -12.6%.

Assume the Euro Interest Rate Is 7