Question

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year:

Percentage Change Probability of Occurrence

-5% 20%

-3% 50%

1% 30%

If the Russian interest rate is 30 percent, what is the expected cost of financing a one-year loan in rubles?

	a.	32.86 percent.
	b.	25.32 percent
	c.	27.14 percent.
	d.	26.10 percent.

Answer 1

Effective Rate of Financing needs to be computed in the following way:

If the Probability remains at 20%, effective Rate of financing would be [{(1 + rate of interest) * (1+/- % change in interest rate)}-1]* Probability rate of 20% = [{(1.30)*(0.95)}-1]*0.2 = 4.7%

If the Probability remains at 50%, effective Rate of financing would be [{(1 + rate of interest) * (1+/- % change in interest rate)}-1]* Probability rate of 50% = [{(1.30)*(0.97)}-1]*0.5 = 13.05%

If the Probability remains at 30%, effective Rate of financing would be [{(1 + rate of interest) * (1+/- % change in interest rate)}-1]* Probability rate of 20% = [{(1.30)*(1.01)}-1]*0.3 = 9.39%

So the expected cost of financing a one-year loan in bubbles would be = 4.7% + 13.05% + 9.39% = 27.14%

So the correct option is 27.14% and hence option (c) is correct.