Textbook Problem

Interest Rate Parity Application to Short-Term Financing Seabreeze Co. needs to finance some dollar-denominated expenses for one year. It can borrow euros at a lower cost than it can borrow dollars. Interest rate parity exists. The oneyear forward rate of the euro contains a premium of 4 percent. If the company believes the euro will appreciate by 6 percent over the next year, would its expected financing expense be lower if it borrowed dollars or euros?