XYZ Co. needs to borrow 100 units of country L money, where the interest rate would be equal to 10%. Alternatively, XYZ can borrow in country F, where the interest rate would be equal to 12.75% (if = 12.75%). The current exchange rate (eo) between countries L and F is (CF / CL) = 10, where CF and CL represent equivalent amounts of currency of countries F and L respectively. In other words, one unit of country L currency is equivalent to ten units of country F currency. The loan will be repaid in one year. The uncertainty about the exchange rate next year is expressed as a uniformly distributed random variable (e1) with a lower limit of 95 and an upper limit of 10.5. What is the probability (pr) that XYZ will be better off by borrowing in country F rather than country L? Justify your answer.
XYZ Co. needs to borrow 100 units of country L money, where the interest rate would be equal to 10%. Alternatively, XYZ can borrow in country F, where the interest rate would be equal to 12.75% (if = 12.75%). The current exchange rate (eo) between countries L and F is (CF / CL) = 10, where CF and CL represent equivalent amounts of currency of countries F and L respectively. In other words, one unit of country L currency is equivalent to ten units of country F currency. The loan will be repaid in one year. The uncertainty about the exchange rate next year is expressed as a uniformly distributed random variable (e1) with a lower limit of 95 and an upper limit of 10.5. What is the probability (pr) that XYZ will be better off by borrowing in country F rather than country L? Justify your answer.