Question 5 (10 points) 1. Briefly explain two methods, a firm can apply to minimise the foreign exchange risk on foreign financing. (2 points) 2. Assume that interest rate parity exists. If the forward rate is an unbiased forecast of the future spot rate, explain the implications from borrowing a foreign currency (versus local financing) over time.(2 Points) 3. Assume that Davenport Inc. needs $3 million for a one-year period. Within one year, it will generate enough Australian dollars to pay off the loan. It is considering three options: (1) borrowing Australian dollars at an interest rate of 6%, (2) borrowing Japanese yen at an interest rate of 5%, or (3) borrowing Canadian dollars at an interest rate of 4%. Davenport Inc. expects that the Japanese yen will depreciate by 1% over the next year and that the Canadian dollar will appreciate by 2%. . What is the expected "effective" financing rate for each of the three options? (4 points) . Which option appears to be most feasible? (1 point) - Why might Davenport Inc. not necessarily choose the option reflecting the lowest effective financing rate? (1 point) Question 5 (10 points) 1. Briefly explain two methods, a firm can apply to minimise the foreign exchange risk on foreign financing. (2 points) 2. Assume that interest rate parity exists. If the forward rate is an unbiased forecast of the future spot rate, explain the implications from borrowing a foreign currency (versus local financing) over time.(2 Points) 3. Assume that Davenport Inc. needs $3 million for a one-year period. Within one year, it will generate enough Australian dollars to pay off the loan. It is considering three options: (1) borrowing Australian dollars at an interest rate of 6%, (2) borrowing Japanese yen at an interest rate of 5%, or (3) borrowing Canadian dollars at an interest rate of 4%. Davenport Inc. expects that the Japanese yen will depreciate by 1% over the next year and that the Canadian dollar will appreciate by 2%. . What is the expected "effective" financing rate for each of the three options? (4 points) . Which option appears to be most feasible? (1 point) - Why might Davenport Inc. not necessarily choose the option reflecting the lowest effective financing rate? (1 point)