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 ____.
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

Quizplus · Accepted Answer

If the foreign currency appreciates, the cost of repaying the loan in terms of the domestic currency increases, leading to an effective financing rate higher than the foreign currency's interest rate.

When a UK Firm Borrows a Foreign Currency and Has