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Assume that interest rate parity exists; also assume that Boca believes that the one-year forward rate 


1. IRP Application to Short-term Financing. Assume that interest rate parity exists. If a firm
believes that the forward rate is an unbiased predictor of the future spot rate, will it expect to
achieve lower financing costs by consistently borrowing a foreign currency with a low interest
rate?
2. Effective Financing Rate. Boca, Inc., needs $4 million for one year. It currently has no business
in Japan but plans to borrow Japanese yen from a Japanese bank, because the Japanese interest
rate is three percentage points lower than the U.S. rate. Assume that interest rate parity exists; also
assume that Boca believes that the one-year forward rate of the Japanese yen will exceed the
future spot rate one year from now. Will the expected effective financing rate be higher, lower, or
the same as financing with dollars? Explain.




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