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.
-Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis?
A)about 10%.
B)about -10%.
C)about -1%.
D)about -2%.
E)none of the above

Question

Quizplus · Accepted Answer

Depreciation of leu: .00010/.00011- 1 = -9.09%
Effective financing rate: (1.08) - [1 + (-9.09%)] - 1 = -1.82%.

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