Question

Assume the borrowing interest rate of the US dollar is 5%, the British pound is 4% and

the US MNC company expects a change in the value of GBP compared to USD with
scenarios of 2%, 1%, -2% with certainty. Yields are 25%, 55%, and 20% respectively in
the upcoming year. The expected effective funding rate of this strategy is

Answer 1

The expected effective funding rate of this strategy is 40.5%.

Step-by-step explanation:

To calculate the rate of the strategy, multiplying the probability of each scenario with the yield of that scenario, and then summing up the results. Let's calculate:

1. Scenario: GBP appreciation of 2%
2. Probability: 25%
3. Yield: 25%
4. Calculation: 0.25 * 0.25 = 0.0625
5. Scenario: GBP appreciation of 1%
6. Probability: 55%
7. Yield: 55%
8. Calculation: 0.55 * 0.55 = 0.3025
9. Scenario: GBP depreciation of 2%
10. Probability: 20%
11. Yield: 20%
12. Calculation: 0.20 * 0.20 = 0.04

Summing up the results: 0.0625 + 0.3025 + 0.04

= 0.405

Therefore, the expected effective funding rate of this strategy is 40.5%.