Question 1

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

Accepted Answer

A)  locally 
B)  in the foreign country 
C)  either A or B 
D)  part of the funds locally, and part from the foreign country 
A)  locally 
B)  in the foreign country 
C)  either A or B 
D)  part of the funds locally, and part from the foreign country

Question 2

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:
 $\begin{array}{lcc}
\text { \underline{Cuntency} } & \text { \underline{Percentage Change }} & \text { \underline{Probability }} \
\text { Canadian dollar } & 2.0 \% & 30 \% \
\text { Canadian dollar } & 4.0 \% & 70 \% \
\text { Japanese yen } & -3.0\% & 60 \% \
\text { Japanese yen } & 1.0 \% & 40 \%
\end{array}$
-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 3

Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest rate is 13%. If the Chilean peso ____ by ____%, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.

Accepted Answer

A)  depreciates; 3.54 
B)  appreciates; 3.54 
C)  depreciates; 3.67 
D)  appreciates; 3.67 
A)  depreciates; 3.54 
B)  appreciates; 3.54 
C)  depreciates; 3.67 
D)  appreciates; 3.67

Question 4

____ are free of default risk.

Accepted Answer

A)  Euronotes 
B)  Eurobonds 
C)  Euro-commercial paper 
D)  None of the above 
A)  Euronotes 
B)  Eurobonds 
C)  Euro-commercial paper 
D)  None of the above

Question 5

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

Accepted Answer

A)  negative. 
B)  zero. 
C)  positive, but lower than the interest rate of their respective countries. 
D)  higher than the interest rate of their respective countries. 
A)  negative. 
B)  zero. 
C)  positive, but lower than the interest rate of their respective countries. 
D)  higher than the interest rate of their respective countries.

Question 6

If interest rate parity does not hold, and the forward ____ is ____ the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing

Accepted Answer

A)  premium; higher than 
B)  discount; higher than 
C)  premium; less than 
D)  A and B 
A)  premium; higher than 
B)  discount; higher than 
C)  premium; less than 
D)  A and B

Question 7

Which of the following is probably not a scenario under which a U.S.-based MNC would consider short-term foreign financing?

Accepted Answer

A)  Canadian dollars offer a lower interest rate than available in the U.S. and are expected to appreciate over the maturity of the loan. 
B)  Australian dollars offer a lower interest rate than available in the U.S. and are expected to depreciate over the maturity of the loan. 
C)  A U.S. firms has net receivables in Cyprus pounds. 
D)  A and C. 
E)  None of the above 
A)  Canadian dollars offer a lower interest rate than available in the U.S. and are expected to appreciate over the maturity of the loan. 
B)  Australian dollars offer a lower interest rate than available in the U.S. and are expected to depreciate over the maturity of the loan. 
C)  A U.S. firms has net receivables in Cyprus pounds. 
D)  A and C. 
E)  None of the above

Question 8

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?

Accepted Answer

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

Question 9

A negative effective financing rate implies that the U.S. firm actually paid fewer dollars in total loan repayment than the number of dollars borrowed.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

A firm forecasts the euro's value as follows for the next year:
 $\begin{array}{l}
\text { Possible }\
\begin{array} { c c } 
\text { Percentge Change } & \text { Prabability } \
\hline - 2 \% & 10 \% \
3 \% & 50 \% \
6 \% & 40 \%
\end{array}
\end{array}$ 
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%.

Question 14

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 15

Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $____, and $____ are needed to repay the loan.

Accepted Answer

A) 375,000; 449,400 
B) 449,400; 375,000 
C) 6,000,000; 5,357,143 
D) 5,357,143; 6,000,000 
A) 375,000; 449,400 
B) 449,400; 375,000 
C) 6,000,000; 5,357,143 
D) 5,357,143; 6,000,000

Question 16

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:
 $\begin{array}{lcc}
\text { \underline{Cuntency} } & \text { \underline{Percentage Change }} & \text { \underline{Probability }} \
\text { Canadian dollar } & 2.0 \% & 30 \% \
\text { Canadian dollar } & 4.0 \% & 70 \% \
\text { Japanese yen } & -3.0\% & 60 \% \
\text { Japanese yen } & 1.0 \% & 40 \%
\end{array}$
-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 17

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 18

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 19

Which of the following statement is false?

Accepted Answer

A)  If interest rate parity holds, foreign financing a simultaneous hedge of that position in the forward market will result in financing costs similar to those in domestic financing. 
B)  If interest rate parity holds, and the forward rate is an accurate forecast of the future spot rate, uncovered foreign financing will result in financing costs similar to those in domestic financing. 
C)  If interest rate parity holds, and the forward rate is expected to overestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing. 
D)  If interest rate parity holds, and the forward rate is expected to underestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing. 
A)  If interest rate parity holds, foreign financing a simultaneous hedge of that position in the forward market will result in financing costs similar to those in domestic financing. 
B)  If interest rate parity holds, and the forward rate is an accurate forecast of the future spot rate, uncovered foreign financing will result in financing costs similar to those in domestic financing. 
C)  If interest rate parity holds, and the forward rate is expected to overestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing. 
D)  If interest rate parity holds, and the forward rate is expected to underestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.

Question 20

A large firm may finance in a foreign currency to offset a net payable position in that foreign country.

Accepted Answer

A) True 
 B)False

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

Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest rate is 13%. If the Chilean peso by %, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.

____ are free of default risk.

If interest rate parity does not hold, and the forward is the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing

Which of the following is probably not a scenario under which a U.S.-based MNC would consider short-term foreign financing?

A negative effective financing rate implies that the U.S. firm actually paid fewer dollars in total loan repayment than the number of dollars borrowed.

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.

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:

A negative effective financing rate indicates that an MNC:

A firm forecasts the euro's value as follows for the next year: Possible Percentge Change Prabability -2\% 10\% 3\% 50\% 6\% 40\% 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:

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:

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 effective financing rate:

Which of the following statement is false?

A large firm may finance in a foreign currency to offset a net payable position in that foreign country.

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

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

Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest rate is 13%. If the Chilean peso ____ by ____%, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.

____ are free of default risk.

If interest rate parity does not hold, and the forward ____ is ____ the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing

Which of the following is probably not a scenario under which a U.S.-based MNC would consider short-term foreign financing?

A negative effective financing rate implies that the U.S. firm actually paid fewer dollars in total loan repayment than the number of dollars borrowed.

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.

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:

A negative effective financing rate indicates that an MNC:

A firm forecasts the euro's value as follows for the next year: Possible Percentge Change Prabability -2\% 10\% 3\% 50\% 6\% 40\% 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:

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:

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 effective financing rate:

Which of the following statement is false?

A large firm may finance in a foreign currency to offset a net payable position in that foreign country.

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

Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest rate is 13%. If the Chilean peso by %, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.

If interest rate parity does not hold, and the forward is the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing