The U S financing rate is 6 percent and the financing rate in France is 7...
The U S financing rate is 6 percent and the financing rate in France is 7 percent. The expected cost of financing in dollars and financing in euros next year would be the same if the euro is expected to:
A) Appreciate by 0.935 percent
B) Depreciate by 0.935 percent
C) Depreciate by 0.943 percent
D) Appreciate by 0 .943 percent
E) None of the above
Please show how answer is derived.
Homework Answers
Currency with higher interest rate depreciates.
If euro depreciates by (1+6%)/(1+7%)-1, then expected cost of financing in dollars and financing in euros next year would be the same.
Therefore, for expected cost of financing in dollars and financing in euros next year would be the same,
euro should depreciates by (1+6%)/(1+7%)-1 = 0.935%
Therefore option B is correct.
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