Exam 20: Short-Term Financing

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.

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 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 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 ____.

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

A negative effective financing rate indicates that an MNC:

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?

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:

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:

Euronotes are underwritten by:

The interest rates on Euronotes are based on:

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

Which of the following statements is false?

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

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?

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.

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.