A European borrower borrows $5,000,000 from an American bank for one year. The interest rate is...

A European borrower borrows $5,000,000 from an American bank for one year. The interest rate is 7%. The exchange rate at the start of the year is $258/€ and is $215/€ at the end of the year. What is the European borrower’s EUR-denominated equivalent cost of borrowing? Please answer in PERCENT form.

Hint: This is similar to computing a $-denominated equivalent cost of borrowing for a U.S. firm.

Expert Solution

Euros borrowed = 5,000,000/258 = $19,379.84

At the end of Year,

Dollars to be paid = 5,000,000(1.07) = $5,350,000

Euros to be paid = 5,350,000/215 = $24,883.72

Cost of Borrowing = (24,883.72 - 19,379.84)/19,379.84

Cost of Borrowing = 28.40%

jeff jeffy answered 2 years ago

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