Assume that interest rates of most industrialized countries are similar to the U.S. interest rate. In the last few months, the currencies of all industrialized countries weakened substantially against the U.S. dollar. If non-U.S. firms based in these countries financed with U.S. dollars during this period (even when they had no receivables in dollars), 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

If the currencies of all industrialized countries weakened substantially against the U.S. dollar and interest rates of most industrialized countries are similar to the U.S. interest rate, then financing with U.S. dollars would have become more expensive for non-U.S. firms based in these countries. This is because they would have to repay the principal and interest in U.S. dollars, which would have become more expensive due to the weakening of their local currencies. Therefore, their effective financing rate would have been higher than the interest rate of their respective countries.

Assume That Interest Rates of Most Industrialized Countries Are Similar