Implications of the Forward Rate for Foreign Financing Mizner, Inc., is a U.S.-based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one-year loan of 10 million pesos to cover its operating expenses. The subsidiary can borrow pesos at 11 percent and can use peso revenues to be received over the year to repay the loan. Alternatively, it can borrow dollars at 6 percent. Interest rate parity exists. The forward rate of the peso is expected to overestimate the spot rate of the peso in one year. Should the subsidiary borrow pesos or dollars?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 20, Problem 12QA
Textbook Problem

Implications of the Forward Rate for Foreign Financing Mizner, Inc., is a U.S.-based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one-year loan of 10 million pesos to cover its operating expenses. The subsidiary can borrow pesos at 11 percent and can use peso revenues to be received over the year to repay the loan. Alternatively, it can borrow dollars at 6 percent. Interest rate parity exists. The forward rate of the peso is expected to overestimate the spot rate of the peso in one year. Should the subsidiary borrow pesos or dollars?

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