Question 1

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

Accepted Answer

A)  high; low 
B)  low; high 
C)  high; high 
D)  A and B are correct 
A)  high; low 
B)  low; high 
C)  high; high 
D)  A and B are correct C

Question 2

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

Accepted Answer

A) True 
 B)False  False

Question 3

A negative effective financing rate for a U.S. firm implies that the firm:

Accepted Answer

A)  will incur a loss on the project financed with the funds. 
B)  paid more interest on the funds than what it would have paid if it had borrowed dollars. 
C)  will be unable to repay the loan. 
D)  none of the above 
A)  will incur a loss on the project financed with the funds. 
B)  paid more interest on the funds than what it would have paid if it had borrowed dollars. 
C)  will be unable to repay the loan. 
D)  none of the above D

Question 4

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 ____.

Accepted Answer

A)  high; low 
B)  high; high 
C)  low; low 
D)  low; high 
A)  high; low 
B)  high; high 
C)  low; low 
D)  low; high

Question 5

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 6

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:
$\begin{array}{c}
\begin{array}{lll}
\text {Mean effective financing rate of Japanese yen for six months}\
\text { Mean effective financing rate of Sudanese dinar for six months }\
\text {Standard deviation of Japanese yen's effective financing rate }\
\text {Standard deviation of Sudanese dinar's effective financing rat}\
\text { Correlation coefficient of effective financing rates of these two currencies} 
\end{array}
\begin{array}{c}
4 \% \
1 \% \
.10 \
.20 \
.23 
\end{array}
\end{array}$

-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 7

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year:
 $\begin{array}{cccc}
\underline  {\text {  Percentage Change} }&\underline{   \text { Probability of Occurrence }} \
 \text {-5\%  } &20\%\
 \text { -3\% } &50\%\
 \text { 1\% } &30\%\
\end{array}$
 
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 8

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:

Accepted Answer

A)  less than the domestic interest rate. 
B)  greater than the domestic interest rate. 
C)  equal to the domestic interest rate. 
D)  greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount. 
A)  less than the domestic interest rate. 
B)  greater than the domestic interest rate. 
C)  equal to the domestic interest rate. 
D)  greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount.

Question 9

When a U.S. 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 ____.

Accepted Answer

A)  foreign currency's interest rate; appreciates 
B)  foreign currency's interest rate; depreciates 
C)  domestic interest rate; depreciates 
D)  domestic interest rate; appreciates 
A)  foreign currency's interest rate; appreciates 
B)  foreign currency's interest rate; depreciates 
C)  domestic interest rate; depreciates 
D)  domestic interest rate; appreciates

Question 10

If movements of two currencies with low interest rates are highly negatively correlated, then financing in a portfolio of currencies would not be very beneficial. That is, financing with such a portfolio would not be very different from financing with a single foreign currency.

Accepted Answer

A) True 
 B)False

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. financing rate is 10 percent and that the financing rate in Germany is 9 percent. An MNC would be indifferent between financing in dollars and financing in euros next year if the euro is expected to ____.

Accepted Answer

A)  appreciate by 0.92%. 
B)  depreciate by 0.92%. 
C)  appreciate by 1.00%. 
D)  depreciate by 1.00%. 
A)  appreciate by 0.92%. 
B)  depreciate by 0.92%. 
C)  appreciate by 1.00%. 
D)  depreciate by 1.00%.

Question 13

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 14

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

Accepted Answer

A)  on average, the foreign effective financing rate is greater than the domestic interest rate. 
B)  on average, the foreign effective financing rate is less than the domestic rate. 
C)  the foreign effective financing rate exceeds the U.S. interest rate when its forward rate exhibits a discount and is less than the U.S. interest rate when its forward rate exhibits a premium. 
D)  the foreign effective financing rate is less than the U.S. interest rate when its forward rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits a discount. 
A)  on average, the foreign effective financing rate is greater than the domestic interest rate. 
B)  on average, the foreign effective financing rate is less than the domestic rate. 
C)  the foreign effective financing rate exceeds the U.S. interest rate when its forward rate exhibits a discount and is less than the U.S. interest rate when its forward rate exhibits a premium. 
D)  the foreign effective financing rate is less than the U.S. interest rate when its forward rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits a discount.

Question 15

Foreign financing costs in a single foreign currency ____ financing costs in dollars, and the variance of foreign financing costs over time is ____ than the variance of financing in dollars.

Accepted Answer

A)  are higher than; higher than 
B)  can be lower or higher than; higher than 
C)  can be lower or higher than; lower than 
D)  are lower than; higher than 
A)  are higher than; higher than 
B)  can be lower or higher than; higher than 
C)  can be lower or higher than; lower than 
D)  are lower than; higher than

Question 16

An MNC's parent or subsidiary in need for funds commonly determines whether there are any available internal funds before searching for outside funding.

Accepted Answer

A) True 
 B)False

Question 17

Euronotes are underwritten by:

Accepted Answer

A)  European central banks. 
B)  commercial banks. 
C)  the International Monetary Fund. 
D)  the Federal Reserve System. 
A)  European central banks. 
B)  commercial banks. 
C)  the International Monetary Fund. 
D)  the Federal Reserve System.

Question 18

Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6%. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?

Accepted Answer

A) 37.8%. 
B) 51.43%. 
C) -25.8%. 
D) -6%. 
E) none of the above 
A) 37.8%. 
B) 51.43%. 
C) -25.8%. 
D) -6%. 
E) none of the above

Question 19

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

Accepted Answer

A)  have future cash inflows in that foreign currency. 
B)  have future cash outflows in that foreign currency. 
C)  have offsetting future cash inflows and outflows in that foreign currency. 
D)  have no other cash flows in that foreign currency. 
A)  have future cash inflows in that foreign currency. 
B)  have future cash outflows in that foreign currency. 
C)  have offsetting future cash inflows and outflows in that foreign currency. 
D)  have no other cash flows in that foreign currency.

Question 20

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%.

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

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

A negative effective financing rate for a U.S. firm implies that the firm:

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 .

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).

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year: -5\% 20\% -3\% 50\% 1\% 30\% If the Russian interest rate is 30%, the expected cost of financing a one-year loan in rubles is:

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:

When a U.S. 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 .

If movements of two currencies with low interest rates are highly negatively correlated, then financing in a portfolio of currencies would not be very beneficial. That is, financing with such a portfolio would not be very different from financing with a single foreign currency.

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.

Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. An MNC would be indifferent between financing in dollars and financing in euros next year if the euro is expected to ____.

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

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

Foreign financing costs in a single foreign currency financing costs in dollars, and the variance of foreign financing costs over time is than the variance of financing in dollars.

An MNC's parent or subsidiary in need for funds commonly determines whether there are any available internal funds before searching for outside funding.

Euronotes are underwritten by:

Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6%. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?

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

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

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

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

A negative effective financing rate for a U.S. firm implies that the firm:

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 ____.

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).

Maston Corporation has forecasted the value of the Russian ruble as follows for the next year: -5\% 20\% -3\% 50\% 1\% 30\% If the Russian interest rate is 30%, the expected cost of financing a one-year loan in rubles is:

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:

When a U.S. 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 ____.

If movements of two currencies with low interest rates are highly negatively correlated, then financing in a portfolio of currencies would not be very beneficial. That is, financing with such a portfolio would not be very different from financing with a single foreign currency.

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.

Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. An MNC would be indifferent between financing in dollars and financing in euros next year if the euro is expected to ____.

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

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

Foreign financing costs in a single foreign currency ____ financing costs in dollars, and the variance of foreign financing costs over time is ____ than the variance of financing in dollars.

An MNC's parent or subsidiary in need for funds commonly determines whether there are any available internal funds before searching for outside funding.

Euronotes are underwritten by:

Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6%. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of borrowing yen?

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

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

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

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 .

When a U.S. 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 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.

Foreign financing costs in a single foreign currency financing costs in dollars, and the variance of foreign financing costs over time is than the variance of financing in dollars.