Kushter Inc. would like to finance in euros. European interest rates are currently 4 percent, and the euro is expected to depreciate by 2 percent over the next year. What is Kushter's effective financing rate next year?

Question

Quizplus · Accepted Answer

The effective financing rate can be calculated using the formula: (1 + interest rate) * (1 + expected change in exchange rate) - 1. Here, it is (1 + 0.04) * (1 - 0.02) - 1 = 1.04 * 0.98 - 1 = 0.0192 or 1.92 percent.