Maston Corporation has forecasted the value of the Russian ruble as follows for the next year:
$\begin{array}{cccc}
\underline {\text { Percentage Change} }&\underline{ \text { Probability of Occurrence }} \
\text {-5\% } &20\%\
\text { -3\% } &50\%\
\text { 1\% } &30\%\
\end{array}$

If the Russian interest rate is 30%, the expected cost of financing a one-year loan in rubles is:
A)27.14%.
B)32.86%.
C)26.10%.
D)none of the above

Question

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year:
 $\begin{array}{cccc}
\underline  {\text {  Percentage Change} }&\underline{   \text { Probability of Occurrence }} \
 \text {-5\%  } &20\%\
 \text { -3\% } &50\%\
 \text { 1\% } &30\%\
\end{array}$
 
If the Russian interest rate is 30%, the expected cost of financing a one-year loan in rubles is: 
A)27.14%.
B)32.86%.
C)26.10%.
D)none of the above

Quizplus · Accepted Answer

The expected percentage change in the ruble is calculated as: (-5% * 20%) + (-3% * 50%) + (1% * 30%) = -2.2%. The expected cost of financing is the Russian interest rate plus the expected percentage change in the ruble: 30% - 2.2% = 27.8%. However, the closest option is 27.14%, which accounts for compounding effects.

Maston Corporation Has Forecasted the Value of the Russian Ruble