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International Cost of Borrowing

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Suppose that on January 1st the annual cost of borrowing in JPY and US dollars are 2% and 7% respectively (Rjpy=2% and RUS=7%). The spot rate of USD on January 1st is USD/JPY110. One year forward rate was quoted as USD/JPY102. What is the USD cost of borrowing in JPY?

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Solution Summary

The solution computes the actual cost of borrowing in USD, if borrowed in JPY.

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Solution:

Let us assume that the borrower borrows JPY 110. Therefore, he has to pay USD 1 today.

Interest to be ...

Solution provided by:
Radhika Lakshmi, MPhil
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  • MPhil, Madurai Kamaraj University
  • MCom, Annamalai University
  • IATA, International Air Transport Association
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