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AFP Certified Treasury Professional CTP Question # 439 Topic 21 Discussion

AFP Certified Treasury Professional CTP Question # 439 Topic 21 Discussion

CTP Exam Topic 21 Question 439 Discussion:
Question #: 439
Topic #: 21

An Australian firm wishes to borrow CAD 100 million for 10 years to fund an investment in Canada that matures in 12 years. The current exchange rate is AUD/CAD 1.25. The company expects to use the annual net profit of CAD 25-50 million to fund its interest and principal payments. In a rising rate environment, the firm is able to lock in a fixed interest rate of 2.95% from its Australian lender. A Canadian lender is willing to provide a floating rate CAD loan at 235 basis points over the Bank of Canada benchmark lending rate of 0.5%, offering an all-in interest rate cap of 6.00% with a 75 bps premium. What should the company do to manage its foreign exchange exposure?


A.

Borrow from the Australian lender only since the Canadian profit more than offsets the loan cost.


B.

Borrow from the Canadian lender and take the interest cap with the premium.


C.

Borrow from the Australian lender and enter into a currency swap with a counterparty bank.


D.

Borrow from the Canadian lender, as the Canadian profit will offset the cost.


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