An Australian company wishes to borrow AUD1 000 000 for ten years. The ten-year bond rate in the U.K. is 3.50%, the AUD/GBP spot rate is 2.5000 and the estimated spot rate at maturity is 2.2000. What is the estimated effective annual financing rate?

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The effective annual financing rate is the rate that takes into account the impact of the exchange rate on the cost of borrowing. In this case, the Australian company is borrowing in GBP and will have to repay the loan in GBP. However, the company will receive the loan in AUD and will have to convert it to GBP at the spot rate. The effective annual financing rate is calculated as follows:EAR = (1 + r_GBP)^n * (S_f/S_0) - 1where:r_GBP is the ten-year bond rate in the U.K.n is the number of yearsS_f is the estimated spot rate at maturityS_0 is the spot ratePlugging in the numbers, we get:EAR = (1 + 0.035)^10 * (2.2000/2.5000) - 1 = 0.0219 = 2.19%Therefore, the estimated effective annual financing rate is 2.19%.

An Australian Company Wishes to Borrow AUD1 000 000 for Ten