Exam 20: Short-Term Financing

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:

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

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.

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 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.

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

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?

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.

Which of the following is not a source of external short-term financing for MNCs?

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

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.

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?

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.

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.

A risk-averse firm would prefer to borrow ____ when the expected financing costs in a foreign country are similar to the costs in the local country.

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.

To avoid exchange rate risk when borrowing a foreign currency, an MNC could hedge its position by using interest rate swaps.

An MNC's parent or subsidiary in need for funds commonly determines whether there are any available internal funds before searching for outside funding.

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:

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?