During the recent and ongoing financial crisis, many firms needed access to USD funds, but for various reasons, markets were "frozen" and firms had limited opportunity to borrow USD through normal channels from their regular banks.
Assume that banks in the local market are not "frozen" so that a firm still has access to lending from its local bank in local currency (LC) terms. Using the principles of covered interest parity,
a. Explain how a local firm can use a LC loan to synthetically create a 1-year USD loan.
b. How would you estimate the approximate cost of this synthetic USD loan?
c. Discuss the costs and benefits to the local firm from using the synthetic approach, rather than using a true USD loan.