14-96 What must be the spot exchange rate to eliminate the preference for the yen loans?
A)$0.6416/¥.
B)$0.5798/¥.
C)$0.6118/¥.
D)$0.5991/¥.
E)Insufficient information.

Question

Quizplus · Accepted Answer

The spot exchange rate to eliminate the preference for the yen loans is the rate that makes the present value of the two loans equal. The present value of the dollar loan is $100,000/(1+0.08)^3 = $79,383.23. The present value of the yen loan is ¥100,000,000/(1+0.04)^3 = ¥85,733,871.23. To make the present values equal, the spot exchange rate must be such that ¥85,733,871.23 = $79,383.23 * spot exchange rate. Solving for the spot exchange rate, we get spot exchange rate = ¥85,733,871.23/$79,383.23 = $0.6416/¥.

14-96 What Must Be the Spot Exchange Rate to Eliminate