Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. The expected cost of financing in dollars and financing in euros next year would be the same if the euro is expected to:

Question

Quizplus · Accepted Answer

The expected cost of financing in dollars and euros would be the same if the euro appreciates by the difference in interest rates, which is 1% (10% - 9%). Since the euro needs to appreciate to offset the higher U.S. rate, the correct choice is an appreciation of 0.92% (approximately 1% when considering compounding effects).