A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9%. It uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S. one-year interest rate is 10%. The expected effective financing rate on Swiss francs is:
A) equal to the U.S. interest rate.
B) less than the U.S. interest rate, but more than the Swiss interest rate.
C) equal to the Swiss interest rate.
D) less than the Swiss interest rate.
E) more than the U.S. interest rate.

Question

Quizplus · Accepted Answer

The expected effective financing rate on Swiss francs is equal to the Swiss interest rate. This is because the U.S. firm is borrowing in Swiss francs and will be repaying in Swiss francs. The Swiss interest rate is the rate that the firm will be charged for borrowing in Swiss francs.

A US Firm Plans to Borrow Swiss Francs Today for a a One-Year