Question Details

How is it possible for a firm to incur a negative effective financing 


1. Short-term Financing Analysis. Assume that Tulsa Inc. needs $3 million for a one-year period.
Within one year, it will generate enough U.S. dollars to pay off the loan. It is considering three
options: (1) borrowing U.S. dollars at an interest rate of 6%, (2) borrowing Japanese yen at an
interest rate of 3%, or (3) borrowing Canadian dollars at an interest rate of 4%. Tulsa Inc. expects
that the Japanese yen will appreciate by 1% over the next year and that the Canadian dollar will
appreciate by 3%. What is the expected “effective” financing rate for each of the three options?
Which option appears to be most feasible? Why might Tulsa Inc. not necessarily choose the option
reflecting the lowest effective financing rate?

2. Effective Financing Rate. How is it possible for a firm to incur a negative effective financing rate?



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