Break-Even Financing
Orlando, Inc., is a U.S.- based MNC with a subsidiary in Mexico. Its Mexi- can subsidiary needs a one-year loan of 10 million pesos for operating expenses. Since the Mexican interest rate is 70 percent, Orlando is considering borrowing dollars, which it would convert to pe- sos to cover the operating expenses.
Required:
Question: By how much would the dollar have to appreciate against the peso to cause such a strategy to back?re? (The one-year U.S. interest rate is 9 percent.)