Assume the U.S. interest rate is 7.5 percent, the New Zealand interest rate is 6.5 percent, the spot rate of the NZ$ is $.52, and the one-year forward rate of the NZ$ is $.50. At the end of the year, the spot rate is $.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan?

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Quizplus · Accepted Answer

The effective financing rate is the difference between the domestic interest rate and the foreign interest rate adjusted for the change in the exchange rate. In this case, the domestic interest rate is 7.5%, the foreign interest rate is 6.5%, and the change in the exchange rate is (0.52 - 0.48) / 0.52 = -7.7%. Therefore, the effective financing rate is 7.5% - 6.5% - (-7.7%) = -1.7%.