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The MS Manufacturing Company in Mexico borrowed $100,000 US from the Bank of America;

the loan carried an interest rate of 12% and the exchange rate at the time the funds were advanced

was 10 pesos to $1 US. The principal and interest were repaid exactly one year later, when the exchange rate was $1 pesos equals $0.091 US.


a) For the scenario described above, what was the actual rate of interest paid by MS Manufacturing Company on the loan?

b) Consider this revised scenario: MS Manufacturing is able to borrow an amount locally from a Mexican a loan rate of 15%. when the exchange rate was 10 pesos to $1 US is 15%. Alternatively, MS Manufacturing could borrow $100,000 US at 12%. The forward exchange rate is 1 pesos to $0.095 US (current spot exchange rate is 10 pesos to $1US). What should MS Manufacturing do to minimize their borrowing costs? (Hint: Compare borrowing in the U.S. versus domestically in Mexic0.)


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