GBA Company wishes to raise $5,000,000 with debt financing. The funds will be repaid with interest in 1 year. The treasurer of GBA Company is considering three sources: i. Borrow USD from Citibank at 1.50% ii. Borrow EUR from Deutsche Bank at 3.00% iii. Borrow GBP from Barclays at 4.00% If the company borrows in euros or British pounds, it will not cover the foreign exchange risk; that is, it will change foreign currency for dollars at today’s spot rate and buy foreign currency back 1 year later at the spot rate prevailing then. The GBA Company has no operations in Europe. A representative of GBA contacts a local academic to provide projections of the spot rates 1 year in the future. The academic comes up with the following table: Currency Spot Rate Projected Rate 1 Year in the Future USD/GBP 1.5 1.55 USD/EUR 0.95 0.85 What is the expected interest rate cost for the loans in EUR and GBP?
GBA Company wishes to raise $5,000,000 with debt financing. The funds will be repaid with interest in 1 year. The treasurer of GBA Company is considering three sources:
- i. Borrow USD from Citibank at 1.50%
- ii. Borrow EUR from Deutsche Bank at 3.00%
iii. Borrow GBP from Barclays at 4.00%
If the company borrows in euros or British pounds, it will not cover the foreign exchange risk; that is, it will change foreign currency for dollars at today’s spot rate and buy foreign currency back 1 year later at the spot rate prevailing then. The GBA Company has no operations in
Europe.
A representative of GBA contacts a local academic to provide projections of the spot rates 1 year in the future. The academic comes up with the following table:
|
Currency |
Spot Rate |
Projected Rate 1 Year in the Future |
|
USD/GBP |
1.5 |
1.55 |
|
USD/EUR |
0.95 |
0.85 |
What is the expected interest rate cost for the loans in EUR and GBP?
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