Question 1

Euronotes are unsecured debt securities whose interest rate is based on the London Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months.

Accepted Answer

A) True 
 B)False

Question 2

Exhibit 20-1
Assume a U.S.-based MNC is borrowing Romanian leu at an interest rate of 8 percent for one year. Also assume that the spot rate of the leu is $.00012 and the one-year forward rate of the leu is $.00010. The expected spot rate of the leu one year from now is $.00011.
-Refer to Exhibit 20-1 above. What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis?

Accepted Answer

A)  about 10 percent 
B)  about -10 percent 
C)  about -1 percent 
D)  about -2 percent 
E)  None of these are correct. 
A)  about 10 percent 
B)  about -10 percent 
C)  about -1 percent 
D)  about -2 percent 
E)  None of these are correct.

Question 3

The effective financing rate of financing in a foreign currency is directly determined by the ____ over the loan period and the ____ over the loan period.

Accepted Answer

A)  interest rate of the domestic currency; percentage change in the value of the foreign currency 
B)  interest rate of the foreign currency; percentage change in the value of the foreign currency 
C)  interest rate of the foreign currency; percentage change in inflation 
D)  interest rate of the domestic currency; percentage change in inflation 
A)  interest rate of the domestic currency; percentage change in the value of the foreign currency 
B)  interest rate of the foreign currency; percentage change in the value of the foreign currency 
C)  interest rate of the foreign currency; percentage change in inflation 
D)  interest rate of the domestic currency; percentage change in inflation

Question 4

A large firm may finance in a foreign currency to offset a net payable position in that foreign country.

Accepted Answer

A) True 
 B)False

Question 5

Countries with a ____ rate of inflation tend to have a ____ interest rate.

Accepted Answer

A)  high; low 
B)  low; high 
C)  high; high 
D)  high; low AND low; high 
A)  high; low 
B)  low; high 
C)  high; high 
D)  high; low AND low; high

Question 6

Assume that the U.S. interest rate is 11 percent while the interest rate on the euro is 7 percent. If a U.S. firm borrows euros, the euro would have to ____ against the dollar by ____ in order to have the same effective financing rate as borrowing dollars.

Accepted Answer

A)  depreciate; about 3.74 percent 
B)  appreciate; about 3.74 percent 
C)  appreciate; about 4.53 percent 
D)  depreciate; about 4.53 percent 
A)  depreciate; about 3.74 percent 
B)  appreciate; about 3.74 percent 
C)  appreciate; about 4.53 percent 
D)  depreciate; about 4.53 percent

Question 7

Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency.

Accepted Answer

A) True 
 B)False

Question 8

​Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7 percent. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $____, and the MNC needs $____ to repay the loan.

Accepted Answer

A)  ​375,000; 449,400 
B)  ​449,400; 375,000 
C)  ​6,000,000; 5,357,143 
D)  ​5,357,143; 6,000,000 
A)  ​375,000; 449,400 
B)  ​449,400; 375,000 
C)  ​6,000,000; 5,357,143 
D)  ​5,357,143; 6,000,000

Question 9

Assume that the Swiss franc has an annual interest rate of 8 percent and is expected to depreciate by 6 percent against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is:

Accepted Answer

A)  8 percent. 
B)  14.48 percent. 
C)  2 percent. 
D)  1.52 percent. 
A)  8 percent. 
B)  14.48 percent. 
C)  2 percent. 
D)  1.52 percent.

Question 10

​A negative effective financing rate indicates that an MNC:

Accepted Answer

A)  ​paid only a small amount in interestover and above the amount borrowed. 
B)  ​has been negatively affected by a large appreciation of the foreign currency. 
C)  ​actually paid fewer dollars to repay the loan than it borrowed. 
D)  ​would have been better off borrowing in the United States. 
A)  ​paid only a small amount in interestover and above the amount borrowed. 
B)  ​has been negatively affected by a large appreciation of the foreign currency. 
C)  ​actually paid fewer dollars to repay the loan than it borrowed. 
D)  ​would have been better off borrowing in the United States.

Question 11

​Assume the U.S. one-year interest rate is 9 percent, while the Chilean one-year interest rate is 13 percent. If the Chilean peso ____ by ____ percent, a U.S.-based MNC would incur the same financing cost in dollars as in Chilean pesos over a one-year period.

Accepted Answer

A)  ​depreciates; 3.54 
B)  ​appreciates; 3.54 
C)  ​depreciates; 3.67 
D)  ​appreciates; 3.67 
A)  ​depreciates; 3.54 
B)  ​appreciates; 3.54 
C)  ​depreciates; 3.67 
D)  ​appreciates; 3.67

Question 12

Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6 percent. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?

Accepted Answer

A)  37.8 percent 
B)  51.43 percent 
C)  -25.8 percent 
D)  -6 percent 
E)  None of these are correct. 
A)  37.8 percent 
B)  51.43 percent 
C)  -25.8 percent 
D)  -6 percent 
E)  None of these are correct.

Question 13

If Boston Co. has ____ in Canadian dollars, it could reduce its exposure to exchange rate risk by borrowing ____.

Accepted Answer

A)  payables; U.S. dollars 
B)  receivables; U.S. dollars 
C)  payables; Canadian dollars 
D)  receivables; Canadian dollars 
A)  payables; U.S. dollars 
B)  receivables; U.S. dollars 
C)  payables; Canadian dollars 
D)  receivables; Canadian dollars

Question 14

When an MNC borrows in two foreign currencies with lower interest rates than the U.S. rate, the portfolio will have a higher effective financing rate than a loan in U.S. dollars if both currencies depreciate simultaneously against the dollar.

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 20-1
Assume a U.S.-based MNC is borrowing Romanian leu at an interest rate of 8 percent for one year. Also assume that the spot rate of the leu is $.00012 and the one-year forward rate of the leu is $.00010. The expected spot rate of the leu one-year from now is $.00011.
​
-Refer to Exhibit 20-1 above. What is the effective financing rate for the MNC assuming that it borrows leu on a covered basis?

Accepted Answer

A)  10 percent 
B)  -10 percent 
C)  -1 percent 
D)  1 percent 
E)  None of these are correct. 
A)  10 percent 
B)  -10 percent 
C)  -1 percent 
D)  1 percent 
E)  None of these are correct.

Question 16

Assume that interest rates of most industrialized countries are similar to the U.S. interest rate. In the last few months, the currencies of all industrialized countries weakened substantially against the U.S. dollar. If non-U.S. firms based in these foreign countries financed with U.S. dollars during this period (even when they had no receivables in dollars), their effective financing rate would have been:

Accepted Answer

A)  negative. 
B)  zero. 
C)  positive, but lower than the interest rate of their respective countries. 
D)  higher than the interest rate of their respective countries. 
A)  negative. 
B)  zero. 
C)  positive, but lower than the interest rate of their respective countries. 
D)  higher than the interest rate of their respective countries.

Question 17

​When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the ____ if the currency ____.

Accepted Answer

A)  ​foreign currency's interest rate; appreciates 
B)  ​foreign currency's interest rate; depreciates 
C)  ​domestic interest rate; depreciates 
D)  ​domestic interest rate; appreciates 
A)  ​foreign currency's interest rate; appreciates 
B)  ​foreign currency's interest rate; depreciates 
C)  ​domestic interest rate; depreciates 
D)  ​domestic interest rate; appreciates

Question 18

Assume that interest rate parity holds between the United States and Japan. The U.S. one-year interest rate is 7 percent, and Japan's one-year interest rate is 6 percent. What is the approximate effective financing rate of a one-year loan denominated in Japanese yen assuming that the MNC covered its exposure by purchasing yen one year forward?

Accepted Answer

A)  6 percent 
B)  7 percent 
C)  1 percent 
D)  This question cannot be answered without more information. 
A)  6 percent 
B)  7 percent 
C)  1 percent 
D)  This question cannot be answered without more information.

Question 19

​If interest rate parity does not hold and the forward premium exceeds the interest rate differential, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

Accepted Answer

A)  ​lower than the domestic interest rate. 
B)  ​higher than the domestic interest rate. 
C)  ​similar to the domestic interest rate. 
D)  ​highly variable. 
A)  ​lower than the domestic interest rate. 
B)  ​higher than the domestic interest rate. 
C)  ​similar to the domestic interest rate. 
D)  ​highly variable.

Question 20

​If a U.S. firm needs dollars but borrows a foreign currency portfolio, the uncertainty of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual volatility of each currency is ____.

Accepted Answer

A)  ​high; low 
B)  ​high; high 
C)  ​low; low 
D)  ​low; high 
A)  ​high; low 
B)  ​high; high 
C)  ​low; low 
D)  ​low; high

Euronotes are unsecured debt securities whose interest rate is based on the London Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months.

The effective financing rate of financing in a foreign currency is directly determined by the over the loan period and the over the loan period.

A large firm may finance in a foreign currency to offset a net payable position in that foreign country.

Countries with a rate of inflation tend to have a interest rate.

Assume that the U.S. interest rate is 11 percent while the interest rate on the euro is 7 percent. If a U.S. firm borrows euros, the euro would have to against the dollar by in order to have the same effective financing rate as borrowing dollars.

Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency.

Assume that the Swiss franc has an annual interest rate of 8 percent and is expected to depreciate by 6 percent against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is:

A negative effective financing rate indicates that an MNC:

Assume the U.S. one-year interest rate is 9 percent, while the Chilean one-year interest rate is 13 percent. If the Chilean peso by percent, a U.S.-based MNC would incur the same financing cost in dollars as in Chilean pesos over a one-year period.

Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6 percent. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?

If Boston Co. has in Canadian dollars, it could reduce its exposure to exchange rate risk by borrowing .

When an MNC borrows in two foreign currencies with lower interest rates than the U.S. rate, the portfolio will have a higher effective financing rate than a loan in U.S. dollars if both currencies depreciate simultaneously against the dollar.

When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the if the currency .

If interest rate parity does not hold and the forward premium exceeds the interest rate differential, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

If a U.S. firm needs dollars but borrows a foreign currency portfolio, the uncertainty of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are and the individual volatility of each currency is .

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

International Cash Management

Filters

Exam 20: Short-Term Financing

Euronotes are unsecured debt securities whose interest rate is based on the London Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months.

The effective financing rate of financing in a foreign currency is directly determined by the ____ over the loan period and the ____ over the loan period.

A large firm may finance in a foreign currency to offset a net payable position in that foreign country.

Countries with a ____ rate of inflation tend to have a ____ interest rate.

Assume that the U.S. interest rate is 11 percent while the interest rate on the euro is 7 percent. If a U.S. firm borrows euros, the euro would have to ____ against the dollar by ____ in order to have the same effective financing rate as borrowing dollars.

Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency.

Assume that the Swiss franc has an annual interest rate of 8 percent and is expected to depreciate by 6 percent against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is:

​A negative effective financing rate indicates that an MNC:

​Assume the U.S. one-year interest rate is 9 percent, while the Chilean one-year interest rate is 13 percent. If the Chilean peso ____ by ____ percent, a U.S.-based MNC would incur the same financing cost in dollars as in Chilean pesos over a one-year period.

Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6 percent. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?

If Boston Co. has ____ in Canadian dollars, it could reduce its exposure to exchange rate risk by borrowing ____.

When an MNC borrows in two foreign currencies with lower interest rates than the U.S. rate, the portfolio will have a higher effective financing rate than a loan in U.S. dollars if both currencies depreciate simultaneously against the dollar.

​When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the ____ if the currency ____.

​If interest rate parity does not hold and the forward premium exceeds the interest rate differential, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

​If a U.S. firm needs dollars but borrows a foreign currency portfolio, the uncertainty of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual volatility of each currency is ____.

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

International Cash Management

Filters

The effective financing rate of financing in a foreign currency is directly determined by the over the loan period and the over the loan period.

Countries with a rate of inflation tend to have a interest rate.

Assume that the U.S. interest rate is 11 percent while the interest rate on the euro is 7 percent. If a U.S. firm borrows euros, the euro would have to against the dollar by in order to have the same effective financing rate as borrowing dollars.

A negative effective financing rate indicates that an MNC:

Assume the U.S. one-year interest rate is 9 percent, while the Chilean one-year interest rate is 13 percent. If the Chilean peso by percent, a U.S.-based MNC would incur the same financing cost in dollars as in Chilean pesos over a one-year period.

If Boston Co. has in Canadian dollars, it could reduce its exposure to exchange rate risk by borrowing .

When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the if the currency .

If interest rate parity does not hold and the forward premium exceeds the interest rate differential, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

If a U.S. firm needs dollars but borrows a foreign currency portfolio, the uncertainty of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are and the individual volatility of each currency is .