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 expected effective financing rate of the portfolio Luzar is contemplating (assume the two currencies move independently from one another)?
A) 9.03%.
B) 7.00%.
C) 10.00%.
D) 7.59%.
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 expected effective financing rate of the portfolio Luzar is contemplating (assume the two currencies move independently from one another)?
A) 9.03%. 
B) 7.00%. 
C) 10.00%. 
D) 7.59%. 
E) none of the above

Quizplus · Accepted Answer

The expected effective financing rate is calculated by considering the weighted average of the financing rates of the two currencies, assuming they move independently. The calculation involves using the individual rates and their respective weights in the portfolio.

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