Exhibit 20-2
To benefit from the low correlation between the Canadian dollar (C$) and the Japanese yen (¥), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%. Luzar has determined the following possible percentage changes in the two individual currencies as follows:

-Refer to Exhibit 20-2. What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate?
A) 12%.
B) 30%.
C) 100%.
D) 0%.
E) none of the above

Question

Exhibit 20-2
To benefit from the low correlation between the Canadian dollar (C$) and the Japanese yen (¥), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%. Luzar has determined the following possible percentage changes in the two individual currencies as follows:
 
-Refer to Exhibit 20-2. What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate?
A) 12%. 
B) 30%. 
C) 100%. 
D) 0%. 
E) none of the above

Quizplus · Accepted Answer

The Answer of Exhibit 20-2
To benefit from the low correlation between the Canadian dollar (C$) and the Japanese yen (¥), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%. Luzar has determined the following possible percentage changes in the two individual currencies as follows:
 
-Refer to Exhibit 20-2. What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate?
A) 12%. 
B) 30%. 
C) 100%. 
D) 0%. 
E) none of the above

Exhibit 20-2 To Benefit from the Low Correlation Between the Canadian Dollar