Exam 20: Short-Term Financing

​Euronotes are underwritten by:

Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. The expected cost of financing in dollars and financing in euros next year would be the same if the euro is expected to:

​A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:

The interest rates on Euronotes are based on:

One reason an MNC may consider foreign financing is that the proceeds could be used to offset a foreign net payables position.

​Assume the U.S. interest rate is 7.5 percent, the New Zealand interest rate is 6.5 percent, the spot rate of the NZ$ is $.52, and the one-year forward rate of the NZ$ is $.50. At the end of the year, the spot rate is $.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan?

​If interest rate parity exists and the forward rate is expected to overestimate the future spot rate, then uncovered foreign financing is expected to result in an effective financing rate that will be:

Which of the following is a scenario under which a U.S.-based MNC probably would not consider short-term foreign financing?

If interest rate parity does not hold, and the forward ____ is ____ the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing.

If movements of two currencies with low interest rates are highly negatively correlated, then financing in a portfolio of currencies would not be very beneficial. That is, financing with such a portfolio would not be very different from financing with a single foreign currency.

Kushter, Inc. would like to finance in euros. European interest rates are currently 4 percent, and the euro is expected to depreciate by 2 percent over the next year. What is Kushter's effective financing rate next year?

If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate.

A negative effective financing rate implies that the U.S. firm actually paid less to repay the loan than it borrowed.

Assume the U.S. one-year interest rate is 8 percent, and the British one-year interest rate is 6 percent. The one-year forward rate of the pound is $1.97. The spot rate of the pound at the beginning of the year is $1.95. By the end of the year, the pound's spot rate is $2.05. Based on the information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered British loan?

If interest rate parity exists, financing with a foreign currency may still be feasible, but it would have to be conducted on an uncovered basis (i.e., without use of a forward hedge).

If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate.

MNCs may be able to lock in a lower cost by financing in a low-interest-rate foreign currency if they have:

When a U.S. firm borrows a foreign currency that is at a fixed exchange rate and has the same interest rate as the U.S. interest rate, the effective financing rate should be the same as if it borrowed dollars.

If all currencies in a financing portfolio are not correlated with each other, financing with such a portfolio would not be very different from financing with a single foreign currency.

​Assume the annual British interest rate is above the annual U.S. interest rate. Also assume the pound's forward rate of $1.75 equals the pound's spot rate. Given this information, interest rate parity ____ exist, and the U.S. firm ____ lock in a lower financing cost by borrowing pounds for one year.