Suppose that Sanders Co., a U.S.-based MNC, is considering options to finance its U.S. operations with a
Question:
Suppose that Sanders Co., a U.S.-based MNC, is considering options to finance its U.S. operations with a one-year loan. Sanders’ bank offers a one–year loan in U.S. dollars at an interest rate of 8.00%, a one-year loan in Canadian dollars at an interest rate of 3.00%, or a one-year loan in Japanese yen at an interest rate of 4.00%. Sanders is considering borrowing a combination of both yen and Canadian dollars.
The following table shows the effective financing rate for each currency in each outcome. Sanders assumes that the outcome for the Canadian dollar spot rate is independent of the outcome of the Japanese yen spot rate.
Outcome for Currency | Currency | Percentage Change in Spot Rate | Probability of Outcome | Effective Financing Rate for Currency |
|---|---|---|---|---|
| 1 | Canadian Dollar | -1.00% | 50.00% | 1.97000% |
| 2 | Canadian Dollar | 10.00% | 50.00% | 13.30000% |
| 1 | Japanese Yen | -2.00% | 60.00% | 1.92000% |
| 2 | Japanese Yen | 8.00% | 40.00% | 12.32000% |
Suppose that Sanders decides to allocate 50.00% of its portfolio to Canadian dollars and 50.00% of its portfolio to Japanese yen.
Since each of the two currencies has two possible outcomes, there are four total scenarios for Sanders to consider. These four scenarios are summarized in the following table.
Complete the third column of the table, filling in the joint probability of each scenario. Then complete the fourth column of the table, filling in the effective financing rate in each scenario (attached)
Expert Answer:
P ossible Joint Fin ancing Rates Sc enario Canadian Dollar Japanese Yen Joint Prob ability of Sc ena... View the full answer
Corporate Finance Core Principles and Applications
ISBN: 978-0077905200
3rd edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford
