Question 1

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

Accepted Answer

A)  borrowing domestically. 
B)  borrowing a portfolio of foreign currencies that are not highly correlated. 
C)  borrowing a portfolio of foreign currencies that are highly correlated. 
D)  borrowing two foreign currencies that are negatively correlated. 
A)  borrowing domestically. 
B)  borrowing a portfolio of foreign currencies that are not highly correlated. 
C)  borrowing a portfolio of foreign currencies that are highly correlated. 
D)  borrowing two foreign currencies that are negatively correlated. C

Question 2

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  False

Question 3

Assume a U.S.-based MNC is borrowing Romanian leu (ROL)at an interest rate of 8% 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.What is the effective financing rate for the MNC assuming it borrows leu on a covered basis

Accepted Answer

A)  10%. 
B)  -10%. 
C)  -1%. 
D)  1%. 
E)  none of the above 
A)  10%. 
B)  -10%. 
C)  -1%. 
D)  1%. 
E)  none of the above B

Question 4

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

Accepted Answer

A)  about 1.7%. 
B)  about 0.0%. 
C)  about 14.7%. 
D)  about 15.4%. 
E)  about 8.3%. 
A)  about 1.7%. 
B)  about 0.0%. 
C)  about 14.7%. 
D)  about 15.4%. 
E)  about 8.3%.

Question 5

If interest rate parity exists,transactions costs are zero,and the forward rate is an accurate predictor of the future spot rate,then the effective financing rate on a foreign currency:

Accepted Answer

A)  would be equal to the U.S. interest rate. 
B)  would be less than the U.S. interest rate. 
C)  would be more than the U.S. financing rate. 
D)  would be less than the U.S. interest rate if the forward rate exhibited a discount and more than the U.S. interest rate of the forward rate exhibited a premium. 
A)  would be equal to the U.S. interest rate. 
B)  would be less than the U.S. interest rate. 
C)  would be more than the U.S. financing rate. 
D)  would be less than the U.S. interest rate if the forward rate exhibited a discount and more than the U.S. interest rate of the forward rate exhibited a premium.

Question 6

If a firm repeatedly borrows a foreign currency portfolio,the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are __________ and the individual variability 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

Question 7

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

Accepted Answer

A)  lower than 
B)  greater than 
C)  similar to 
D)  none of the above 
A)  lower than 
B)  greater than 
C)  similar to 
D)  none of the above

Question 8

The interest rate of euronotes is based on the T-bill rate.

Accepted Answer

A) True 
 B)False

Question 9

A U.S.firm plans to borrow Swiss francs today for a oneyear period.  The Swiss interest rate is 9%.  It uses today's spot rate as a forecast for the franc's spot rate in one year.  The U.S.oneyear interest rate is 10%.  The expected effective financing rate on Swiss francs is:

Accepted Answer

A)  equal to the U.S. interest rate. 
B)  less than the U.S. interest rate, but more than the Swiss interest rate. 
C)  equal to the Swiss interest rate. 
D)  less than the Swiss interest rate. 
E)  more than the U.S. interest rate. 
A)  equal to the U.S. interest rate. 
B)  less than the U.S. interest rate, but more than the Swiss interest rate. 
C)  equal to the Swiss interest rate. 
D)  less than the Swiss interest rate. 
E)  more than the U.S. interest rate.

Question 10

Morton Company obtains a one-year loan of 2,000,000 Sudanese dinar (SDD)at an interest rate of 6%.At the time the loan is extended,the spot rate of the dinar is $.005.If the spot rate of the dinar at maturity of the loan is $.0035,what is the effective financing rate of borrowing dinar

Accepted Answer

A)  37.8%. 
B)  51.43%. 
C)  -25.8%. 
D)  -6%. 
E)  none of the above 
A)  37.8%. 
B)  51.43%. 
C)  -25.8%. 
D)  -6%. 
E)  none of the above

Question 11

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

Accepted Answer

A)  high;low 
B)  low;high 
C)  high;high 
D)  A and B are correct 
A)  high;low 
B)  low;high 
C)  high;high 
D)  A and B are correct

Question 12

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 nonU.S.firms based in these 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 13

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 14

If interest rate parity exists and transactions costs are zero,foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

Accepted Answer

A)  less than the domestic interest rate. 
B)  greater than the domestic interest rate. 
C)  equal to the domestic interest rate. 
D)  greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount. 
A)  less than the domestic interest rate. 
B)  greater than the domestic interest rate. 
C)  equal to the domestic interest rate. 
D)  greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount.

Question 15

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year:
 
If the Russian interest rate is 30%,the expected cost of financing a one-year loan in rubles is:

Accepted Answer

A)  27.14%. 
B)  32.86%. 
C)  26.10%. 
D)  none of the above 
A)  27.14%. 
B)  32.86%. 
C)  26.10%. 
D)  none of the above

Question 16

A firm forecasts the euro's value as follows for the next year:
 
The annual interest rate on euro is 7%.  The expected value of the effective financing rate from a U.S.firm's perspective is about:

Accepted Answer

A)  8.436%. 
B)  10.959%. 
C)  11.112%. 
D)  11.541%. 
A)  8.436%. 
B)  10.959%. 
C)  11.112%. 
D)  11.541%.

Question 17

Assume that interest rate parity exists,and there are zero transactions costs.  If the forward rate consistently underestimates the future spot rate,then:

Accepted Answer

A)  on average, the foreign effective financing rate is greater than the domestic interest rate. 
B)  on average, the foreign effective financing rate is less than the domestic rate. 
C)  the foreign effective financing rate exceeds the U.S. interest rate when its forward rate exhibits a discount and is less than the U.S. interest rate when its forward rate exhibits a premium. 
D)  the foreign effective financing rate is less than the U.S. interest rate when its forward rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits a discount. 
A)  on average, the foreign effective financing rate is greater than the domestic interest rate. 
B)  on average, the foreign effective financing rate is less than the domestic rate. 
C)  the foreign effective financing rate exceeds the U.S. interest rate when its forward rate exhibits a discount and is less than the U.S. interest rate when its forward rate exhibits a premium. 
D)  the foreign effective financing rate is less than the U.S. interest rate when its forward rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits a discount.

Question 18

What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate

Accepted Answer

A)  12%. 
B)  30%. 
C)  100%. 
D)  0%. 
E)  none of the above 
A)  12%. 
B)  30%. 
C)  100%. 
D)  0%. 
E)  none of the above

Question 19

The effective financing rate:

Accepted Answer

A)  adjusts the nominal interest rate for inflation over the period of concern. 
B)  adjusts the nominal rate for the forward discount (or premium) over the period of concern. 
C)  adjusts the nominal interest rate for the change in the spot exchange rate over the period of concern. 
D)  adjusts the nominal rate for a change in foreign interest rates over the period of concern. 
A)  adjusts the nominal interest rate for inflation over the period of concern. 
B)  adjusts the nominal rate for the forward discount (or premium) over the period of concern. 
C)  adjusts the nominal interest rate for the change in the spot exchange rate over the period of concern. 
D)  adjusts the nominal rate for a change in foreign interest rates over the period of concern.

Question 20

Assume that the U.S.interest rate is 11% while the interest rate on euro is 7%.  If euros are borrowed by a U.S.firm,they would have to _________ against the dollar by __________ in order to have the same effective financing rate from borrowing dollars.

Accepted Answer

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

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

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

If interest rate parity exists,transactions costs are zero,and the forward rate is an accurate predictor of the future spot rate,then the effective financing rate on a foreign currency:

If a firm repeatedly borrows a foreign currency portfolio,the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are __ and the individual variability of each currency is _.

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

The interest rate of euronotes is based on the T-bill rate.

A U.S.firm plans to borrow Swiss francs today for a oneyear period. The Swiss interest rate is 9%. It uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S.oneyear interest rate is 10%. The expected effective financing rate on Swiss francs is:

Morton Company obtains a one-year loan of 2,000,000 Sudanese dinar (SDD)at an interest rate of 6%.At the time the loan is extended,the spot rate of the dinar is $.005.If the spot rate of the dinar at maturity of the loan is $.0035,what is the effective financing rate of borrowing dinar

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

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 exists and transactions costs are zero,foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year: If the Russian interest rate is 30%,the expected cost of financing a one-year loan in rubles is:

A firm forecasts the euro's value as follows for the next year: The annual interest rate on euro is 7%. The expected value of the effective financing rate from a U.S.firm's perspective is about:

Assume that interest rate parity exists,and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate,then:

What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate

The effective financing rate:

Assume that the U.S.interest rate is 11% while the interest rate on euro is 7%. If euros are borrowed by a U.S.firm,they would have to _ against the dollar by __ in order to have the same effective financing rate from borrowing dollars.

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

Multinational Restructuring

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Financing

Financing International Trade

International Cash Management

Filters

Exam 20: Short-Term Financing

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

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

If interest rate parity exists,transactions costs are zero,and the forward rate is an accurate predictor of the future spot rate,then the effective financing rate on a foreign currency:

If a firm repeatedly borrows a foreign currency portfolio,the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are __________ and the individual variability of each currency is _________.

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

The interest rate of euronotes is based on the T-bill rate.

A U.S.firm plans to borrow Swiss francs today for a oneyear period. The Swiss interest rate is 9%. It uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S.oneyear interest rate is 10%. The expected effective financing rate on Swiss francs is:

Morton Company obtains a one-year loan of 2,000,000 Sudanese dinar (SDD)at an interest rate of 6%.At the time the loan is extended,the spot rate of the dinar is $.005.If the spot rate of the dinar at maturity of the loan is $.0035,what is the effective financing rate of borrowing dinar

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

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 exists and transactions costs are zero,foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year: If the Russian interest rate is 30%,the expected cost of financing a one-year loan in rubles is:

A firm forecasts the euro's value as follows for the next year: The annual interest rate on euro is 7%. The expected value of the effective financing rate from a U.S.firm's perspective is about:

Assume that interest rate parity exists,and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate,then:

What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate

The effective financing rate:

Assume that the U.S.interest rate is 11% while the interest rate on euro is 7%. If euros are borrowed by a U.S.firm,they would have to _________ against the dollar by __________ in order to have the same effective financing rate from borrowing dollars.

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

Multinational Restructuring

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Financing

Financing International Trade

International Cash Management

Filters

If a firm repeatedly borrows a foreign currency portfolio,the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are __ and the individual variability of each currency is _.

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

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 .

Assume that the U.S.interest rate is 11% while the interest rate on euro is 7%. If euros are borrowed by a U.S.firm,they would have to _ against the dollar by __ in order to have the same effective financing rate from borrowing dollars.