Question 1

The effective financing rate:

Accepted Answer

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

Question 2

Exhibit 20-1
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.
-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 3

Exhibit 20-2
To benefit from the low correlation between the Canadian dollar (C$) and the Japanese yen (¥), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%. Luzar has determined the following possible percentage changes in the two individual currencies as follows:
  
-Refer to Exhibit 20-2. 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%. 
B)  7.00%. 
C)  10.00%. 
D)  7.59%. 
E)  none of the above 
A)  9.03%. 
B)  7.00%. 
C)  10.00%. 
D)  7.59%. 
E)  none of the above

Question 4

A U.S. firm plans to borrow Swiss francs today for a one-year 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. one-year 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 5

MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect.

Accepted Answer

A)  payables; euros 
B)  receivables; euros 
C)  payables; dollars 
D)  receivables; dollars 
A)  payables; euros 
B)  receivables; euros 
C)  payables; dollars 
D)  receivables; dollars

Question 6

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

Accepted Answer

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

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

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.

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 9

A negative effective financing rate indicates that an MNC:

Accepted Answer

A)  paid only a small amount in interested over 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 U.S. 
A)  paid only a small amount in interested over 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 U.S.

Question 10

Exhibit 20-2
To benefit from the low correlation between the Canadian dollar (C$) and the Japanese yen (¥), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%. Luzar has determined the following possible percentage changes in the two individual currencies as follows:
  
-Refer to Exhibit 20-2. 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 11

Assume that the U.S. interest rate is 11% while the interest rate on the 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%

Question 12

Assume the U.S. one-year interest rate is 8%, and the British one-year interest rate is 6%. 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?

Accepted Answer

A)  about 12.4%. 
B)  about 7.1%. 
C)  about 13.5%. 
D)  about 10.3%. 
E)  about 11.3%. 
A)  about 12.4%. 
B)  about 7.1%. 
C)  about 13.5%. 
D)  about 10.3%. 
E)  about 11.3%.

Question 13

Exhibit 20-3
Cameron Corporation would like to simultaneously borrow Japanese yen (¥) and Sudanese dinar (SDD) for a six-month period. Cameron would like to determine the expected financing rate and the variance of a portfolio consisting of 30% yen and 70% dinar. Cameron has gathered the following information:
  
-Refer to Exhibit 20-3. What is the expected standard deviation of the portfolio contemplated by Cameron?

Accepted Answer

A)  2.24%. 
B)  14.98%. 
C)  2.89%. 
D)  17.00%. 
E)  none of the above 
A)  2.24%. 
B)  14.98%. 
C)  2.89%. 
D)  17.00%. 
E)  none of the above

Question 14

Exhibit 20-3
Cameron Corporation would like to simultaneously borrow Japanese yen (¥) and Sudanese dinar (SDD) for a six-month period. Cameron would like to determine the expected financing rate and the variance of a portfolio consisting of 30% yen and 70% dinar. Cameron has gathered the following information:
  
-Refer to Exhibit 20-3. What is the expected financing rate of the portfolio contemplated by Cameron Corporation?

Accepted Answer

A)  3.10%. 
B)  1.90%. 
C)  17.00%. 
D)  13.00%. 
E)  none of the above 
A)  3.10%. 
B)  1.90%. 
C)  17.00%. 
D)  13.00%. 
E)  none of the above

Question 15

A firm forecasts the euro's value as follows for the next year:   The annual interest rate on the 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%.

The effective financing rate:

A U.S. firm plans to borrow Swiss francs today for a one-year 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. one-year interest rate is 10%. The expected effective financing rate on Swiss francs is:

MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has in euros, it could borrow , resulting in an offsetting effect.

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

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

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 negative effective financing rate indicates that an MNC:

Assume that the U.S. interest rate is 11% while the interest rate on the 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.

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

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

The effective financing rate:

A U.S. firm plans to borrow Swiss francs today for a one-year 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. one-year interest rate is 10%. The expected effective financing rate on Swiss francs is:

MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect.

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

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

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 negative effective financing rate indicates that an MNC:

Assume that the U.S. interest rate is 11% while the interest rate on the 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.

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

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

MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has in euros, it could borrow , resulting in an offsetting effect.

Assume that the U.S. interest rate is 11% while the interest rate on the 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.