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:
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

Quizplus · Accepted Answer

The weakening of their home currencies against the UK pound would increase the cost of repaying the pound-denominated debt, leading to a higher effective financing rate.

Assume That Interest Rates of Most Industrialized Countries Are Similar