4. Portland Ltd, an Australian firm, needs AUD10 million to finance a new project in USA. Thecompany has the capacity to borrow either from an Australian bank which offers 7% (AUD loan)annual interest rate or from a USA bank which offers 6% (USD loan) annual interest rate. Theloan expects to settle after one year period. You found following additional information:The current spot is USD1.0654/AUDOne year forward rate is USD1.0455/AUD.Required: Recommend the loan which provides better off to the company.

According to interest rate parity the interest rate and exchange rate must be in equilibrium and…

Portland Ltd, an Australian firm, needs AUDI0 million to finance a new project in USA. company has the capacity to borrow either from an Australian bank which offers 7% (AUD 1- annual interest rate or from a USA bank which offers 6% (USD loan) annual interest rate. loan expects to settle after one year period. You found following additional information: The current spot is USD1.0654/AUD One year forward rate is USD1.0455/AUD. Required: Recommend the loan which provides better off to the company.

Portland Ltd, an Australian firm, needs AUDI0 million to finance a new project in USA. company has the capacity to borrow either from an Australian bank which offers 7% (AUD 1- annual interest rate or from a USA bank which offers 6% (USD loan) annual interest rate. loan expects to settle after one year period. You found following additional information: The current spot is USD1.0654/AUD One year forward rate is USD1.0455/AUD. Required: Recommend the loan which provides better off to the company.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

4. Portland Ltd, an Australian firm, needs AUD10 million to finance a new project in USA. The
company has the capacity to borrow either from an Australian bank which offers 7% (AUD loan)
annual interest rate or from a USA bank which offers 6% (USD loan) annual interest rate. The
loan expects to settle after one year period. You found following additional information:
The current spot is USD1.0654/AUD
One year forward rate is USD1.0455/AUD.
Required: Recommend the loan which provides better off to the company.

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