Morning Star Air, headquartered in Kunming, China, needs US$28,000,000 for one y
ID: 2790562 • Letter: M
Question
Morning Star Air, headquartered in Kunming, China, needs
US$28,000,000
for one year to finance working capital. The airline has two alternatives for borrowing:
a. Borrow
US$28,000,000
in Eurodollars in London at
7.35%
per annum
b. Borrow
HK$217,137, 200
in Hong Kong at
7.15%
per annum, and exchange these Hong Kong dollars at the present exchange rate of
HK$7.7549/US$
for U.S. dollars.
At what ending exchange rate would Morning Star Air be indifferent between borrowing U.S. dollars and borrowing Hong Kong dollars?
Explanation / Answer
Loan amount 28,000,000 Interest 7.35% Amount payable after 1 year =28000000*107.35% 30,058,000 Loan in HK 217,137,200 Interest 7.15% Amount payable after 1 year =217137200*107.15% 232,662,510 Conversion rate after 1 year to keep the borrower indifferent will be so much that total outlay remains same. Desired conversion rate =232662510/30,058,000 Desired conversion rate 7.74045
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.