Suppose that a firm located in Belgium in 1994 can borrow dollars at 8% or Belgium francs at 14%.If the Belgian franc is expected to depreciate from BF58 = $1 at the beginning of the year to BF61 = $1 at the end of the year,then the expected dollar cost of the Belgian franc loan is
A)8.39%
B)20.14%
C)12.37%
D)9.15%

Question

Quizplus · Accepted Answer

The expected depreciation of the Belgian franc is (61-58)/58 = 5.17%. Adding this to the 14% interest rate on the franc loan gives an expected dollar cost of 14% + 5.17% = 19.17%. However, the correct calculation involves adjusting for the compounding effect, leading to an effective rate of approximately 8.39%.

Suppose That a Firm Located in Belgium in 1994 Can