Question

Let's assume that Postcrop Inc. a U.S.based multinational corporation, obtains a one-year loan of 1,500,000 euro at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the euro is $.25. If the spot rate of the euro in one year is $.28, the dollar amount initially obtained from the loan is $_______, and $_______ is needed to repay the loan.

Answer 1

AMOUNT OF LOAN IN DOLLAR TERMS (AT THE TIME LOAN TAKEN)

= 1500000 EURO X 0.25 = $375000

AMOUNT OF LOAN IN DOLLAR TERMS (AT THE TIME OF PAYING THE LOAN)

AMOUNT PAYABLE IN EUROS = 1500000 X (1+0.07) =1605000 EUROS

EQUIVALENT IN DOLLARS = 1605000 X 0.28 = 449400

SO ANWER IS :

If the spot rate of the euro in one year is $.28, the dollar amount initially obtained from the loan is $375000, and $449400 is needed to repay the loan.

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