Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Assume that the UK interest rate is 11% while the interest rate on euro is 7%.
If euros are borrowed by a UK firm, they would have to _________ against the pound by __________ in
order to have the same effective financing rate from borrowing pounds.
a. | depreciate; about 3.74% c. appreciate; about 4.53% | b. | appreciate; about
3.74% d. depreciate; about 4.53% |
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2.
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Assume the annual British interest rate is above the annual U.S. interest rate.
Also assume the dollar's forward rate in pounds equals the dollar’s spot rate. Given this
information, interest rate parity __________ exist, and the U.S. firm __________ lock in a lower
financing cost by borrowing pounds for one year.
a. | does; could | c. | does not; could not | b. | does; could not | d. | does not; could |
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3.
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If interest rate parity exists and transactions costs are zero, foreign
financing with a simultaneous forward purchase of the currency borrowed will result in an effective
financing rate that is:
a. | less than the domestic interest rate. | b. | greater than the domestic interest
rate. | c. | equal to the domestic interest rate. | d. | greater than the domestic interest rate if the
forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits
a discount. |
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4.
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The variance in financing costs over time is _______ for foreign financing than
domestic financing. The variance when financing with foreign currencies is lower when those
currencies exhibit _______ correlations, assuming the firm has no other business in those
currencies.
a. | lower; low | c. | higher; high | b. | lower; high | d. | higher; low |
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5.
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A UK firm plans to borrow Swiss francs today for a one-year period. The Swiss
interest rate is 9%. It uses today's spot rate as a forecast for the franc's spot rate in
one year. The UK one-year interest rate is 10%. The expected effective financing rate on Swiss francs
is:
a. | equal to the UK interest rate. | b. | less than the UK interest rate, but more than
the Swiss interest rate. | c. | equal to the Swiss interest
rate. | d. | less than the Swiss interest rate. | e. | more than the UK interest
rate. |
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6.
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Assume Jelly ltd, a UK-based MNC, obtains a one-year loan of 1,500,000 Malaysian
ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of
the ringgit is £0.14. If the spot rate of the ringgit in one year is £0.16, the pound
amount initially obtained from the loan is £__________, and £___________ are needed to
repay the loan.
a. | 210,000; 256,800 | c. | 6,000,000; 5,357,143 | b. | 210,000; 375,100 | d. | 5,357,143;
6,000,000 |
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7.
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Assume a UK-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 £0.00007 and the one-year forward
rate of the leu is £0.00005. The expected spot rate of the leu one-year from now is
£0.00006. What is the effective financing rate (to the nearest percent) for the MNC assuming it
borrows leu on a covered basis?
a. | 10%. | b. | -23%. | c. | -1%. | d. | 1%. | e. | none of the
above |
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8.
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Maston ltd has forecasted the value of the Russian rouble as follows for the
next year: Percentage
Change | Probability of
Occurrence | -5% | 20% | -3% | 50% | 1% | 30% | | |
If the Russian interest rate is 30%, the
expected cost of financing a one-year loan in rubles is: a. | 27.14%. | c. | 26.10%. | b. | 32.86%. | d. | none of the
above |
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9.
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Kushter ltd 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?
a. | 1.92% | c. | 6.08% | b. | 2.00% | d. | none of the
above |
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True/False
Indicate whether the
statement is true or false.
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10.
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Euronotes are unsecured debt securities whose interest rate is based on the
London Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months.
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11.
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If all currencies in a financing portfolio are not correlated with each other,
financing with such a portfolio would not be very different from financing with a single foreign
currency.
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12.
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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.
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