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equired interest payments to be paid in December and in June. The entire principal would be due in
December 1989.
This seemed to be an easy choice. The assistant treasurer concluded that 5% was so much less than
11% that it would not matter what happened to exchange rates. The yen could double in value and the
interest would still be less. If the yen strengthened to twice the current level, the effective interest rate
would rise to 10%, and that was still less than 11%.
He believed that any further analysis would be a waste of time. His judgment told him that the
Japanese yen loan was easily the better choice. Still, he looked at history to show his boss that he had
considered what might happen. In the previous two years the dollar had strengthened against the yen.
On December 31, 1982, the exchange rate was 234 yen to one dollar. By December 31, 1984, the rate
had moved to 250 yen to the dollar. This meant that one dollar bought more yen. If the dollar
continued to strengthen, each interest payment would be less than the previous one.
Looking at the history of exchange rates on OANDA.com, he found the statistics for the prior two
years (Exhibit 7.21).
When the decision was made, the dollar was at the highest point of this range on December 31,
1984, at 250.45 yen to the dollar.
It was too much to hope that the dollar would continue to increase in value over the life of the loan,
but that certainly was a possibility. In making his case, the assistant treasurer also compiled a table of
data over the prior 10 years (Exhibit 7.22).
Exhibit 7.22 Amount of yen purchased by $1.
Source: FXHistory © 1997-2008 by OANDA Corporation.
Exhibit 7.23 Calculation of principal of yen loan to equal $200 million.