Chapter 20—Short-Term Financing

1. MNCs may be able to lock in a lower cost from financing in a low interest rate foreign currency if they:

a.	have future cash inflows in that foreign currency.
b.	have future cash outflows in that foreign currency.
c.	have offsetting future cash inflows and outflows in that foreign currency.
d.	have no other cash flows in that foreign currency.

ANS: A PTS: 1

2. Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is:

a.	8%.
b.	14.48%.
c.	2%.
d.	1.52%.

ANS: D

SOLUTION:

(1 + 8%)[1 + (-6%)] - 1 = 1.52%.

PTS: 1

3. Assume that the U.S. interest rate is 11% while the interest rate on the euro is 7%. If euros are borrowed by a U.S. firm, they would have to ____ against the dollar by ____ in order to have the same effective financing rate from borrowing dollars.

a.	depreciate; about 3.74%
b.	appreciate; about 3.74%
c.	appreciate; about 4.53%
d.	depreciate; about 4.53%

ANS: B

SOLUTION:

(1.11/1.07) - 1 = 3.74%. Euros have to appreciate since borrowing in euros is currently cheaper.

PTS: 1

4. When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the ____ if the currency ____.

a.	foreign currency's interest rate; appreciates
b.	foreign currency's interest rate; depreciates
c.	domestic interest rate; depreciates
d.	domestic interest rate; appreciates

ANS: A PTS: 1

5. A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:

a.	borrowing domestically.
b.	borrowing a portfolio of foreign currencies that are not highly correlated.
c.	borrowing a portfolio of foreign currencies that are highly correlated.
d.	borrowing two foreign currencies that are negatively correlated.

ANS: C PTS: 1

6. If a firm repeatedly borrows a foreign currency portfolio, the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual variability of each currency is ____.

a.	high; low
b.	high; high
c.	low; low
d.	low; high

ANS: B PTS: 1

7. Assume the annual British interest rate is above the annual U.S. interest rate. Also assume the pound's forward rate of $1.75 equals the pound'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
b.	does; could not
c.	does not; could not
d.	does not; could

ANS: C PTS: 1

8. A risk-averse firm would prefer to borrow ____ when the expected financing costs are similar in a foreign country as in the local country.

a.	locally
b.	in the foreign country
c.	either A or B
d.	part of the funds locally, and part from the foreign country

ANS: A PTS: 1

9. A firm forecasts the euro's value as follows for the next year:

Possible
Percentage Change	Probability
-2%	10%
3%	50%
6%	40%

The annual interest rate on the euro is 7%. The expected value of the effective financing rate from a U.S. firm's perspective is about:

a.	8.436%.
b.	10.959%.
c.	11.112%.
d.	11.541%.

ANS: B