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Herredura, S.A., based in Monterey, Mexico, is seeking financing for a new production facility. The treasurer...

  1. Herredura, S.A., based in Monterey, Mexico, is seeking financing for a new production facility. The treasurer of the firm is considering a USD denominated loan as the interest rate is much lower than in Mexico (5% in the U.S. vs. 8% in Mexico). The amount of the loan is $1.2m. The current exchange rate is MXN 19.4500/USD.
  1. What would be the effective interest rate on the loan if the exchange is MXN 19.1200/USD a year from now when the loan, principal and interest, is repaid?
  2. What would be the effective interest rate on the loan if the exchange rate is MXN 20.1500/USD in one year?
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