A firm forecasts the euro's value as follows for the next year: The annual interest rate on the euro is 7%. The expected value of the effective financing rate from a U.S. firm's perspective is about:

Question

A firm forecasts the euro's value as follows for the next year:  The annual interest rate on the euro is 7%. The expected value of the effective financing rate from a U.S. firm's perspective is about:

Quizplus · Accepted Answer

To calculate the effective financing rate, we need to use the following formula:

(1 + foreign interest rate)/(1 + home interest rate) - 1

Substituting the values given in the question, we get:

(1 + 0.07)/(1 + 0.10959) - 1 = 0.07616 or 7.616%

Therefore, the expected value of the effective financing rate from a U.S. firm's perspective is about 10.959%. So, the correct answer is B.

A Firm Forecasts the Euro's Value as Follows for the Next