1-A Ukrainian firm wants to borrow 100 million UAH (Ukrainian Hryvni) to fund a capital project. It is for one year. The firm can borrow the money from a Ukrainian bank at an interest rate of 20%. Alternatively, the firm could borrow from a US bank at a rate of 5% a year. At the end of the year, the firm has to pay back the loan and interest. The initial exchange rate is 1 USD = 30 UAH. A conflict with Russia causes a large fluctuation in the value of the UAH. At the end of the year, the exchange rate changes from the initial exchange rate of 1 USD = 30 UAH to 1 USD = 45 UAH.
First, compare the costs of the two lending options for the Ukrainian firm (consider interest and changes in the exchange rates).
Second, which is better if a forward or swap is not an option?
Third, what if you find a US bank that will do a forward rate of 1USD=35 UAH for a cost of 50,000 USD. Would that change your borrowing strategy?