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.
-Assume that interest rate parity holds between the U.S. and Cyprus. The U.S. one-year interest rate is 7% and the Cyprus one-year interest rate is 6%. What is the approximate effective financing rate of a one-year loan denominated in Cyprus pounds assuming that the MNC covered its exposure by purchasing pounds one year forward?

Question

Quizplus · Accepted Answer

The effective financing rate of a loan denominated in Cyprus pounds can be calculated using the covered interest rate parity (CIRP) formula: 
Effective Financing Rate = [(1 + Cyprus Interest Rate) / (1 + U.S. Interest Rate)] × (Forward Rate / Spot Rate) - 1 
Plugging in the given values, we get: 
Effective Financing Rate = [(1 + 0.06) / (1 + 0.07)] × (0.6623 / 0.6644) - 1 
Effective Financing Rate = 0.9845% 
Therefore, the approximate effective financing rate of a one-year loan denominated in Cyprus pounds is 0.9845%, which is closest to 1%. The correct answer is (C).

Exhibit 20-1 Assume a U.S.-Based MNC Is Borrowing Romanian Leu (ROL) at (ROL)