Question

Assume that the Swiss franc has an annual interest rate of 15% and is expected to appreciate by 5% against the dollar over the year. From a U.S. perspective, the effective financing rate from borrowing francs for one year is:

9.25%
The 2.08%
15%
20.75%
20%.

Answer 1

20%

Step-by-step explanation:

To find the effective financing rate from borrowing francs for one year, we need to consider the interest rate and the expected exchange rate change.

First, let's calculate the interest rate in U.S. dollars. The annual interest rate of the Swiss franc is 15%. Since we are borrowing francs, this is the interest rate we will be paying.

Next, we need to consider the expected appreciation of the Swiss franc against the dollar. The expected appreciation is 5%. This means that at the end of the year, the Swiss franc is expected to be worth 5% more in U.S. dollars.

To calculate the effective financing rate, we add the interest rate to the expected exchange rate change. In this case, it would be 15% + 5% = 20%.

Therefore, from a U.S. perspective, the effective financing rate from borrowing francs for one year is 20%.

Note: The answer options you provided are 9.25%, 2.08%, 15%, 20.75%, and 20%. Based on the calculations above, the correct answer is 20%.