Exam 18: Short-Term Financing

Assume the annual British interest rate is above the annual US interest rate. Also assume the dollar's forward rate in pounds equals the dollar's spot rate. Given this information, interest rate parity ____ exist, and the US firm ____ lock in a lower financing cost by borrowing pounds for one year.

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

Assume that interest rates of most industrialized countries are similar to the UK interest rate. In the last few months, the currencies of all industrialized countries weakened substantially against the UK pound. If non-UK firms based in these countries financed with UK pound during this period (even when they had no receivables in pounds), their effective financing rate would have been:

MNCs may be able to lock in a lower cost from financing in a low interest rate foreign currency if they:

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

Assume a UK-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8 per cent for one year. Also assume that the spot rate of the leu is £0.00007 and the one-year forward rate of the leu is £0.0006. The expected spot rate of the leu one-year from now is £0.000065. What is the effective financing rate (to the nearest percent) for the MNC assuming it borrows leu on an uncovered basis?

A UK firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9 per cent. It uses today's spot rate as a forecast for the franc's spot rate in one year. The UK one-year interest rate is 10%. The expected effective financing rate on Swiss francs is:

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

____ are free of default risk.

Assume the UK financing rate is 10 per cent and that the financing rate in Germany is 9 per cent. An MNC would be indifferent between financing in pounds and financing in euros next year if the euro is expected to ____.

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

The effective financing rate:

When a UK 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 ____.

Assume that the Swiss franc has an annual interest rate of 8 per cent and is expected to depreciate by 6 per cent against the pound. From a UK perspective, the effective financing rate from borrowing francs is:

To benefit from the low correlation between the Canadian dollar (C$) and the Japanese yen (¥), Martha ltd decides to borrow 50 per cent of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7 per cent. The Canadian one-year interest rate is 6 per cent and the Japanese one-year interest rate is 10 per cent. Martha has determined the following possible percentage changes in the two individual currencies as follows: Currency Percentage Change Probability Canadian dollar 2)0% 30% Canadian dollar 4)0% 70% Japanese yen -3)0% 60% Japanese yen 1)0% 40% What is the expected effective financing rate of the portfolio Martha is contemplating (assume the two currencies move independently from one another)?

Euronotes are underwritten by:

A negative effective financing rate for a UK firm implies that the firm:

Assume that interest rate parity holds between the UK and Cyprus. The UK one-year interest rate is 7 per cent and the Cyprus one-year interest rate is 6 per cent. What is the approximate effective financing rate of a one-year loan denominated in Cyprus pounds assuming that the MNC covered its exposure by purchasing pounds one year forward?

Assume the UK one-year interest rate is 8 per cent, and the euro one-year interest rate is 6 per cent. The one-year forward rate of the euro is £0.67. The spot rate of the euro at the beginning of the year is £0.65. By the end of the year, the euro's spot rate is £0.68. Based on the information, what is the effective financing rate for a UK firm that takes out a one-year, uncovered euro loan?

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