Quantum Inc., a U.S.-based corporation, borrows SF 2,000,000 from the Swiss bank, UBS. The entire principal is to be repaid at the end of the year, and the interest rate is 4% per annum to be paid at the end of the year in Swiss francs. The current spot rate is SF 0.97/$.
a) Suppose that by year-end, the Swiss franc were to appreciate against the dollar by 10%. Compute the effective cost of the loan (i.e., the effective interest rate in USD).
b) Consider an alternative scenario. Suppose that by the end of the year, the franc were to depreciate against the dollar by 10%. Compute the effective cost of the loan (i.e., the effective interest rate in USD).