Exam 18: Short-Term 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.

The degree of volatility of financing with a currency portfolio depends on only the standard deviations of effective financing rates of the individual currencies within the portfolio.

A negative effective financing rate indicates that a UK MNC:

If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate.

Cameron Corporation Cameron plc 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: Mean effective financing rate of Japanese yen for six months 4% Mean effective financing rate of Sudanese dinar for six months 1% Standard deviation of Japanese yen's effective financing rate .10 Standard deviation of Sudanese dinar's effective financing rate .20 Correlation coefficient of effective financing rates of these two currencies .23 What is the expected standard deviation of the portfolio contemplated by Cameron?

Assume that the UK interest rate is 11 per cent while the interest rate on euro is 7 per cent. If euros are borrowed by a UK firm, they would have to ____ against the pound by ____ in order to have the same effective financing rate from borrowing pounds.

Assume that interest rate parity exists, and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate, then:

Morton Company obtains a one-year loan of 2,000,000 Sudanese dinar (SDD) at an interest rate of 6 per cent. At the time the loan is extended, the spot rate of the dinar is £0.0027. If the spot rate of the dinar at maturity of the loan is £0.0019, what is the effective financing rate of borrowing dinar?

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.

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

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 £0.00005. The expected spot rate of the leu one-year from now is £0.00006. What is the effective financing rate (to the nearest percent) for the MNC assuming it borrows leu on a covered basis?

Assume the euro interest rate is 7.5 per cent, the New Zealand interest rate is 6.5 per cent, the spot rate of the NZ$ is 0.28 euro, and the one-year forward rate of the NZ$ is 0.25 euro. At the end of the year, the spot rate is £0.23 euro. Based on this information, what is the effective financing rate for a euro firm that takes out a one-year, uncovered NZ$ loan?

The variance in financing costs over time is ____ for foreign financing than domestic financing. The variance when financing with foreign currencies is lower when those currencies exhibit ____ correlations, assuming the firm has no other business in those currencies.

If a firm repeatedly borrows a foreign currency portfolio, the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual variability of each currency is ____.

Kushter ltd would like to finance in euros. European interest rates are currently 4%, and the euro is expected to depreciate by 2% over the next year. What is Kushter's effective financing rate next year?

If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

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).

____ typically have maturities of less than one year.

Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency.

If all currencies in a financing portfolio are not correlated with each other, financing with such a portfolio would not be very different from financing with a single foreign currency.