Assume that the U.S.interest rate is 11% while the interest rate on euro is 7%. If euros are borrowed by a U.S.firm,they would have to _________ against the dollar by __________ in order to have the same effective financing rate from borrowing dollars.

Question

Assume that the U.S.interest rate is 11% while the interest rate on euro is 7%.  If euros are borrowed by a U.S.firm,they would have to _________ against the dollar by __________ in order to have the same effective financing rate from borrowing dollars.

Quizplus · Accepted Answer

If a U.S. firm borrows euros at an interest rate of 7%, they would have to convert those euros back into dollars when they repay the loan. If the euro appreciates against the dollar, the U.S. firm would need fewer dollars to repay the loan, effectively lowering the overall cost of borrowing. Therefore, the euro would need to appreciate by about 3.74% against the dollar for the effective financing rate to be the same as borrowing dollars at 11%.

Assume That the U