Question Details

Does borrowing a portfolio of currencies offer any possible advantages 



1. Financing With a Portfolio. Pepperdine, Inc., considers obtaining 40 percent of its one-year
financing in Canadian dollars and 60 percent in Japanese yen. The forecasts of appreciation in the
Canadian dollar and Japanese yen for the next year are as follows:
Probability
Possible Percentage of that Percentage
Change in the Spot Change in the
Currency Rate Over the Loan Life Spot Rate Occurring
Canadian dollar 4% 70%
Canadian dollar 7 30
Japanese yen 6 50
Japanese yen 9 50
The interest rate on the Canadian dollar is 9 percent, and the interest rate on the Japanese yen is 7
percent. Develop the possible effective financing rates of the overall portfolio and the probability
of each possibility based on the use of joint probabilities.

2. Financing With a Portfolio.
a. Does borrowing a portfolio of currencies offer any possible advantages over the borrowing of
a single foreign currency?

b. If a firm borrows a portfolio of currencies, what characteristics of the currencies will affect the
potential variability of the portfolio- effective financing rate? What characteristics would be
desirable from a borrowing firm- perspective?




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