Assume that at the beginning of each of the last seven years, you had the choice of obtaining a one-year loan in U.S. dollars or Japanese yen. Your business is in the United States, but you considered borrowing yen because the yen annual interest rate was 2 percent versus a dollar annual interest rate of 7 percent. Go to www.x-rates.com and click on Historic Lookup (or go to another website that provides historical exchange rates). Obtain the annual percentage change in the yen’s exchange rate for each of the last seven years. Determine the effective financing rate of the yen in each of the last seven years. Based on your results, was the annual effective financing rate lower for the yen or the dollar, on average, over the seven years? In how many of the years would you have been better off financing in yen rather than in dollars? Explain.

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 3IEE
Textbook Problem

Assume that at the beginning of each of the last seven years, you had the choice of obtaining a one-year loan in U.S. dollars or Japanese yen. Your business is in the United States, but you considered borrowing yen because the yen annual interest rate was 2 percent versus a dollar annual interest rate of 7 percent. Go to www.x-rates.com and click on Historic Lookup (or go to another website that provides historical exchange rates). Obtain the annual percentage change in the yen’s exchange rate for each of the last seven years. Determine the effective financing rate of the yen in each of the last seven years. Based on your results, was the annual effective financing rate lower for the yen or the dollar, on average, over the seven years? In how many of the years would you have been better off financing in yen rather than in dollars? Explain.

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