Assume the Euro Interest Rate Is 7

question 32

Multiple Choice

Assume the euro interest rate is 7.5 per cent, the New Zealand interest rate is 6.5 per cent, the spot rate of the NZ$ is 0.28 euro, and the one-year forward rate of the NZ$ is 0.25 euro. At the end of the year, the spot rate is £0.23 euro. Based on this information, what is the effective financing rate for a euro firm that takes out a one-year, uncovered NZ$ loan?

• A) About -12.6%
• B) About 0.0%
• C) About 14.7%
• D) About 15.4%
• E) About 8.3%

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Definitions:

Skepticism

An attitude of doubting the truth of something, such as a claim or statement.

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Empirical Approach

A method of inquiry that emphasizes evidence gathered through observation and experimentation rather than theory alone.

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