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    Exercise Chapter 6

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    Exercise Chapter 6

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    Exercise chapter 6

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    Exercise Chapter 6

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    of 4

    Chapter 6.

    Effective financing interest rates


    Effective financing rates:
    rf = (1+ if) (1 + ef) – 1
    Expected effective support interest rate
    Rf = p1 x rf1 +p2 x rf2 +...+pn x rfn
    Example 1.
    An MNC business based in Japan is considering lending USD with an interest rate of
    5%/year. The probability distribution table shows the volatility of the USD against the
    JPY as follows:
    ef (USD/JPY) % P (%)
    -3 10
    -2 20
    0 30
    2 5
    3 15
    4 12
    5 8
    Let's calculate the effective financing interest rate of USD and make a conclusion about
    when businesses should finance in USD.

    According to the beginning of the exercise, we have: if = 5%


    rf = (1 + if) (1 + ef) – 1
    ef (USD/JPY) % P (%) RF (%)
    -3 10 (1+5%) (1 – 3%)
    – 1 = 1.85
    -2 20 2,9
    0 30 5
    2 5 7,1
    3 15 8,5
    4 12 9,2
    5 8 10,25
    Therefore, the expected effective financing interest rate is:
    Rf = P1 * rf1 + ....Pn * rfn
    = 10% * 1.85% + 20% * 2.9% + 30% * 5% + 5% * 7.1% + 15% * 8.15% + 12% * 9.2% + 8%
    * 10.25% = 5.77% > 5%
    Conclusion: Effective financing interest rates are expected > interest rates for businesses
    borrowing in the market. Therefore, businesses should not borrow USD.
    Lending/Financing: Expectations> Market: Not Implemented
    Mobilization: Expectations > the market: Should be implemented
    Example 2.
    An MNC based in Germany (EUR) is considering borrowing CHF with an interest rate
    of 6%/year. The CHF to EUR volatility probability distribution table is as follows:
    ef (CHF/EUR) P (%)
    %
    -2 5
    -1 10
    0 15
    2 20
    3 25
    4 20
    5 5
    Let's calculate the effective financing interest rate of CHF and make a conclusion when
    the business decides to finance capital with CHF
    Solution
    According to the beginning of the exercise, we have: if = 6%
    rf = (1 + if) (1 + ef) – 1
    ef (CHF/EUR) P (%) RF (%)
    %
    -2 5 (1+6%)(1-2%) –
    1 = 3.88%
    -1 10 4,94
    0 15 6
    2 20 8,12
    3 25 9,18
    4 20 10,24
    5 5 11,3
    Therefore, the expected effective financing interest rate is:
    Rf = P1 * rf1 + ....Pn * rfn
    = 5% * 3.88% + 10% * 4.94% + 15% * 6% + 20% * 8.12% + 25% * 9.18% + 20% * 10.24%
    + 5% * 11.3% = 8.12% > 6%

    Conclusion: Because the effective financing interest rate is expected > the interest rate that
    businesses have to pay when mobilizing capital in the market. Therefore, businesses should
    make sponsorships.

    Exercise 1. An MNC based in Germany (EUR) is considering lending CHF with an interest rate
    of 5%/year. The distribution of the volatility probability of EUR against CHF is as follows:
    ef (CHF/EUR) % P (%)
    -2 5
    -2 10
    0 15
    2 20
    5 25
    3 20
    5 5
    Let's calculate the effective financing interest rate of CHF and make a conclusion when the
    business decides to finance capital with CHF.

    Exercise 2. An MNC based in Germany (EUR) is considering a CHF loan with an interest rate
    of 3%/year. The distribution of the volatility probability of EUR against CHF is as follows:
    ef (CHF/EUR) % P (%)
    -2 10
    -2 10
    0 10
    2 20
    5 25
    4 20
    5 5
    Let's calculate the effective financing interest rate of CHF and make a conclusion when the
    business decides to finance capital with CHF.

    Exercise 3. An MNC based in Germany (EUR) is considering lending CHF with an interest rate
    of 6%/year. The distribution of the volatility probability of EUR against CHF is as follows:
    ef (CHF/EUR) % P (%)
    -2 10
    -2 10
    0 10
    2 23
    5 17
    4 20
    5 10
    Let's calculate the effective financing interest rate of CHF and make a conclusion when the
    business decides to finance capital with CHF.

    Exercise 4. An MNC based in Germany (EUR) is considering lending CHF with an interest rate
    of 4%/year. The distribution of the volatility probability of EUR against CHF is as follows:
    ef (CHF/EUR) % P (%)
    -2 10
    -2 10
    0 10
    2 20
    4 20
    4 20
    5 10
    Let's calculate the effective financing interest rate of CHF and make a conclusion when the
    business decides to finance capital with CHF.

    Exercise 5. An MNC based in Germany (EUR) is considering lending CHF with an interest rate
    of 8%/year. The distribution of the volatility probability of EUR against CHF is as follows:
    ef (CHF/EUR) % P (%)
    -2 10
    -2 10
    0 10
    2 20
    4 20
    4 20
    5 10
    Let's calculate the effective financing interest rate of CHF and make a conclusion when the
    business decides to finance capital with CHF.

    Exercise 6. An MNC based in Germany (EUR) is considering lending CHF with an interest rate
    of 2%/year. The distribution of the volatility probability of EUR against CHF is as follows:
    ef (CHF/EUR) % P (%)
    -2 10
    -2 10
    0 10
    2 20
    3 20
    4 20
    5 10
    Let's calculate the effective financing interest rate of CHF and make a conclusion when the
    business decides to finance capital with CHF.

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