To Benefit from the Low Correlation Between the Canadian Dollar

Multiple Choice

To benefit from the low correlation between the Canadian dollar (C$) and the Japanese yen (¥) , Martha ltd decides to borrow 50 per cent of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7 per cent. The Canadian one-year interest rate is 6 per cent and the Japanese one-year interest rate is 10 per cent. Martha has determined the following possible percentage changes in the two individual currencies as follows: Currency
Percentage Change
Probability
Canadian dollar
2) 0%
30%
Canadian dollar
4) 0%
70%
Japanese yen
-3) 0%
60%
Japanese yen
1) 0%
40%
What is the expected effective financing rate of the portfolio Martha is contemplating (assume the two currencies move independently from one another) ?

A) 9.03%
B) 7.00%
C) 10.00%
D) 7.59%
E) None of the above