Suppose the euro is expected to appreciate by 4% annually against the dollar. If a company can borrow dollars at what is the highest interest rate it should be willing to pay to borrow euro, assuming it is trying to minimize its expected financing cost?

Question

Quizplus · Accepted Answer

The highest interest rate the company should be willing to pay to borrow euros is 4.3%, which is the euro's expected appreciation rate plus 1%.

Suppose the Euro Is Expected to Appreciate by 4% Annually