Suppose that on January 1 a firm in Mexico borrows $20 million from Citibank (USA) for one year at 8.00% interest per annum. During the year U….

Suppose that on January 1 a firm in Mexico borrows $20 million from Citibank (USA) for one year at 8.00% interest per annum. During the year U.S. inflation is 2.00% and Mexican inflation is 12.00%. The loan was taken when the spot rate was Peso 3.40/US$. At the end of the one year loan period the exchange rate was Peso 5.80/US$.

1.Based on the above information, what is the cost to the firm of the loan in Mexican peso’s (percent)?  

(a) 8.00%

(b) 20.00%

(c) 45.72%

(d) 84.24%

2.Howard borrows ¥5,000,000 for 6 months at an annual rate of 0.60% and uses the proceeds to invest in the U.S. money market at an annual rate of 4.50%. If the spot rate today is ¥115/$ and the spot rate in 6 months is ¥113/$ Howard’s net proceeds will be:  

(a) ¥104,130

(b) not enough information given

(c) $921

(d) ¥8,587

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