Question 1

If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate.

Accepted Answer

If interest rate parity exists, the forward exchange rate will adjust such that the overall cost of borrowing is the same regardless of the currency in which the borrowing is done. Therefore, the effective financing rate will be similar to the domestic interest rate, as there will be no advantage or disadvantage to borrowing in a foreign currency.

Question 2

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 3

Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest rate is 13%. If the Chilean peso ____ by ____%, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.

Accepted Answer

To find out the percentage change needed in the Chilean peso, we can use the interest rate parity formula: 
((1 + US interest rate)/(1 + Chilean interest rate)) - 1
((1 + 0.09)/(1 + 0.13)) - 1 = -0.039
This means that the Chilean peso would need to depreciate by 3.9% to offset the higher interest rate. However, none of the answer choices match this percentage exactly, so we need to choose the closest one. 
Choice A, a depreciation of 3.54%, is the closest to the calculated 3.9%. Therefore, if the Chilean peso depreciates by 3.54%, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.

Question 4

Foreign financing costs in a single foreign currency ____ financing costs in dollars, and the variance of foreign financing costs over time is ____ than the variance of financing in dollars.

Accepted Answer

Foreign financing costs in a single foreign currency can be lower or higher than financing costs in dollars, as it depends on various factors such as exchange rates and interest rates. However, the variance of foreign financing costs over time is typically higher than the variance of financing in dollars due to fluctuations in exchange rates.

Question 5

Kushter Inc. would like to finance in euros. European interest rates are currently 4%, and the euro is expected to depreciate by 2% over the next year. What is Kushter's effective financing rate next year?

Accepted Answer

(1.04)(.98) - 1 = 1.92%

Question 6

Which of the following statement is false?

Accepted Answer

If the forward rate underestimates the future spot rate, uncovered foreign financing would result in higher, not lower, financing costs compared to domestic financing.

Question 7

If interest rate parity does not hold, and the forward ____ is ____ the interest rate differential, then foreign financing with a simultaneous hedge of that position in the forward market results in higher financing costs than those of domestic financing

Accepted Answer

The answer of If interest rate parity does not hold,...

Question 8

A negative effective financing rate indicates that an MNC:

Accepted Answer

A negative effective financing rate means that the MNC paid back fewer dollars than it borrowed. This can occur if the interest rate on the foreign currency borrowed is lower than the expected depreciation of that currency over the loan period. Therefore, choice C is the best answer.

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 suggests that the difference in interest rates between two countries should equal the expected change in their exchange rate. If the forward rate is an accurate estimator of the future spot rate, then the expected change in exchange rate is already reflected in the forward rate. Therefore, the foreign financing rate would be similar to the home financing rate.

Question 10

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

Accepted Answer

If Canadian dollars are expected to appreciate, the cost of repaying the loan could increase, making it an unfavorable scenario for short-term foreign financing.

Question 11

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

If the movements of two currencies with low interest rates are highly negatively correlated, financing in a portfolio of currencies can actually provide benefits such as diversification and reduced risk. The negative correlation between the two currencies means that they may not move in the same direction at the same time, reducing the overall volatility of the portfolio. Therefore, financing with such a portfolio can be different from financing with a single foreign currency.

Question 12

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

MNCs generally prioritize using internal funds before seeking external funding sources. This approach helps to minimize costs associated with borrowing and reduce the risk of debt.

Question 13

The degree of volatility of financing with a currency portfolio depends on only the standard deviations of effective financing rates of the individual currencies within the portfolio.

Accepted Answer

The degree of volatility also depends on the correlations between the currencies in the portfolio, not just their individual standard deviations.

Question 14

Countries with a ____ rate of inflation tend to have a ____ interest rate.

Accepted Answer

Countries with a high rate of inflation tend to have a high interest rate as central banks increase rates to control inflation.

Question 15

Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. An MNC would be indifferent between financing in dollars and financing in euros next year if the euro is expected to ____.

Accepted Answer

1.10/1.09 - 1 = 0.92%

Quiz 20: Short-Term Financing