Question 1

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

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 the above 
A) about 10 percent 
B) about -10 percent 
C) about -1 percent 
D) about -2 percent 
E) none of the above

Question 3

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).

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 ____.

Accepted Answer

A) appreciate by 0.92 percent 
B) depreciate by 0.92 percent 
C) appreciate by 1.00 percent 
D) depreciate by 1.00 percent 
A) appreciate by 0.92 percent 
B) depreciate by 0.92 percent 
C) appreciate by 1.00 percent 
D) depreciate by 1.00 percent

Question 6

Exhibit 20-2
Luzar Corporation decides to borrow 50 percent of funds needed in Canadian dollars and the remainder in yen. The U.S. (domestic) financing rate for a one-year loan is 7 percent. The Canadian one-year interest rate is 6 percent, and the Japanese one-year interest rate is 10 percent. Luzar has determined the following possible percentage changes in the two individual currencies as follows:
  
-Refer to Exhibit 20-2 above. What is the expected effective financing rate of the portfolio Luzar is contemplating (assume the two currencies move independently from one another)?

Accepted Answer

A) 9.03 percent 
B) 7.00 percent 
C) 10.00 percent 
D) 7.59 percent 
E) none of the above 
A) 9.03 percent 
B) 7.00 percent 
C) 10.00 percent 
D) 7.59 percent 
E) none of the above

Question 7

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.

Question 8

Exhibit 20-2
Luzar Corporation decides to borrow 50 percent of funds needed in Canadian dollars and the remainder in yen. The U.S. (domestic) financing rate for a one-year loan is 7 percent. The Canadian one-year interest rate is 6 percent, and the Japanese one-year interest rate is 10 percent. Luzar has determined the following possible percentage changes in the two individual currencies as follows:
  
-Refer to Exhibit 20-2 above. What is the probability that the financing rate of the two-currency portfolio is less than the domestic financing rate?

Accepted Answer

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

Question 9

The effective financing rate of financing in a foreign currency depends on 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

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

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).

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. 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 effective financing rate of financing in a foreign currency depends on the over the loan period and the over the loan period.

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 Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

International Cash Management

Filters

Exam 20: Short-Term Financing

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

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).

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. 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 effective financing rate of financing in a foreign currency depends on the ______ over the loan period and the ______ over the loan period.

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 Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

International Cash Management

Filters

The effective financing rate of financing in a foreign currency depends on the over the loan period and the over the loan period.