Question Details

By how much must the euro appreciate to cause the loan 



1. IRP Application to Short-term Financing. If interest rate parity does not hold, what strategy
should Connecticut Co. consider when it needs short-term financing?
a. Assume that Connecticut Co. needs dollars. It borrows euros at a lower interest rate than that
for dollars. If interest rate parity exists and if the forward rate of the euro is a reliable predictor
of the future spot rate, what does this suggest about the feasibility of such a strategy?

b. If Connecticut Co. expects the spot rate to be a more reliable predictor of the future spot rate,
what does this suggest about the feasibility of such a strategy?

2. Break-even Financing. Akron Co. needs dollars. Assume that the local one-year loan rate is 15%,
while a one-year loan rate on euros is 7%. By how much must the euro appreciate to cause the
loan in euros to be more costly than a U.S.-dollar loan?




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