Assume that Tulsa, Inc., needs $3 million for a one-year period. Within one year, it will generate enough U.S. dollars to pay off the loan. It is considering three options:
(1) Borrowing U.S. dollars at an interest rate of 6 percent,
(2) Borrowing Japanese yen at an interest rate of 3 percent, or
(3) Borrowing Canadian dollars at an interest rate of 4 percent.
Tulsa expects that the Japanese yen will appreciate by 1 percent over the next year and that the Canadian dollar will appreciate by 3 percent. What is the expected “effective” financing rate for each of the three options? Which option appears to be most feasible? Why might Tulsa, Inc., not necessarily choose the option reflecting the lowest effective financing rate?