Question 1

Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. The expected cost of financing in dollars and financing in euros next year would be the same if the euro is expected to ____.

Accepted Answer

The expected cost of financing in dollars and in euros next year would be the same if the euro appreciates by the difference in the interest rates, which is 1 percent (10% - 9%). However, for the cost to be the same, the appreciation rate must be slightly less than the interest rate differential due to compounding effects. Therefore, the euro needs to appreciate by slightly less than 1 percent, making 0.92 percent the correct choice.

Question 2

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

Financing in a portfolio of currencies that are highly negatively correlated can be beneficial because the negative correlation means that when one currency weakens, the other tends to strengthen, potentially reducing the overall risk of the portfolio compared to financing with a single foreign currency.

Question 3

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

An MNC usually looks for internal funds before seeking outside funding.

Question 4

When a U.S. firm borrows a foreign currency that is at a fixed exchange rate and has the same interest rate as the U.S. interest rate, the effective financing rate should be the same as if it borrowed dollars.

Accepted Answer

If the foreign currency has a fixed exchange rate with the U.S. dollar and the interest rate is the same as the U.S. interest rate, then the effective financing rate should be equivalent to borrowing in dollars. This is because there should be no difference in the cost of borrowing between the two currencies, as the exchange rate is fixed.

Question 5

To avoid exchange rate risk when borrowing a foreign currency, an MNC could hedge its position by using interest rate swaps.

Accepted Answer

Interest rate swaps are used to hedge against or speculate on changes in interest rates, not to hedge against exchange rate risk. Currency swaps or forward contracts are typically used to hedge exchange rate risk.

Question 6

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

Accepted Answer

Using Canadian dollars for financing would be risky because, although they offer a lower interest rate, they are expected to appreciate, which could increase the cost of repayment.

Question 7

Which of the following statements is false?

Accepted Answer

The answer of Which of the following statements is false?
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Question 8

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

Accepted Answer

The answer of A large firm may finance in a...

Question 9

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.

Accepted Answer

Interest rate parity implies that the difference in interest rates between two countries should be reflected in the exchange rate. If the forward rate is an accurate estimator of the future spot rate, it suggests that the market expects interest rate parity to hold. Therefore, the foreign financing rate and home financing rate should be similar to each other.

Quiz 20: Short-Term Financing