When an MNC finances with a floating-rate loan in a currency that matches its long-term cash inflows, the MNC is exposed to ____ risk.

Question

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When an MNC finances with a floating-rate loan, it is exposed to interest rate risk, which refers to the risk of fluctuation in interest rates. As the interest rate changes over time, the cost of servicing the loan also changes, leading to a change in the MNC's cash flows. However, if the loan currency matches the MNC's long-term cash inflows, the MNC is not exposed to exchange rate risk as there is no exchange rate fluctuations involved. Credit risk is the risk of default by the borrower, which is not relevant in this scenario.

When an MNC Finances with a Floating-Rate Loan in a Currency