1. Assume that at time zero you got a USD 20 million loan in US at a 4% rate per year; that you pay back the loan (plus corresponding interest) at the end of year 2. You invested this loan in country 1 which local currency is the "Sol" (you changed your USD into soles). Assume that FX rate at time zero was 3.5 soles/USD. Assume that you are now at the end of the first year, the current FX rate is 3.65 soles/USD and that the expected exchange rate at time 2 corresponds to the expected rate depreciation of country 1(need to estimate the expected exchange rate ad assume this expectation corresponds to the expected exchange rate at end of year 2). You are asked if it is a good idea to get a loan in soles at 5% per year, use the proceeds of this loan to pay back the loan in the US (assume no transaction costs) and at the end of the second year pay back the loan in local currency (soles).

Is it a good idea? Show your estimations

2. What is the exchange rate that make you indifferent between swapping the debt in USD by one in soles?
4. Based on your "break even" exchange rate estimated in the previous question and the 95% confidence level interval estimated in question 1, How can you use this information to help you decide to swap the debt from USD to soles?  

Answer rating: 100% (QA)

To determine if it is a good idea to get a loan in soles at 5 per year to pay back the original USD ... View the full answer