Exhibit 20-1 Assume a U.S.-Based MNC Is Borrowing Romanian Leu (ROL) at (ROL)

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.
-Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it borrows leu on a covered basis?

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

Correct Answer:

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