International Financial Management Study Set 9

Business

Quiz 18 :

Short-Term Financing

Quiz 18 :

Short-Term Financing

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A negative effective financing rate for a UK firm implies that the firm:
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D

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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?
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A

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Cameron plc would like to simultaneously borrow Japanese yen (¥) and Sudanese dinar (SDD) for a six-month period. Cameron would like to determine the expected financing rate and the variance of a portfolio consisting of 30 per cent yen and 70 per cent dinar. Cameron has gathered the following information: Mean effective financing rate of Japanese yen for six months 4 per cent Mean effective financing rate of Sudanese dinar for six months 1 per cent Standard deviation of Japanese yen's effective financing rate 0.10 Standard deviation of Sudanese dinar's effective financing rate 0.20 Correlation coefficient of effective financing rates of these two currencies 0.23 What is the expected financing rate of the portfolio contemplated by Cameron plc?
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Answer:

B

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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.
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Assume that the UK interest rate is 11 per cent while the interest rate on euro is 7 per cent. 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.
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Assume the annual British interest rate is above the annual US 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 US firm ____ lock in a lower financing cost by borrowing pounds for one year.
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Assume that interest rate parity holds between the UK and Cyprus. The UK one-year interest rate is 7 per cent and the Cyprus one-year interest rate is 6 per cent. What is the approximate effective financing rate of a one-year loan denominated in Cyprus pounds assuming that the MNC covered its exposure by purchasing pounds one year forward?
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Assume that the Swiss franc has an annual interest rate of 8 per cent and is expected to depreciate by 6 per cent against the pound. From a UK perspective, the effective financing rate from borrowing francs is:
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The effective financing rate:
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Assume that interest rate parity exists, and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate, then:
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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:
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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 per cent. 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.
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A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:
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One reason an MNC may consider foreign financing is that the proceeds could be used to offset a foreign net payables position.
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MNCs may be able to lock in a lower cost from financing in a low interest rate foreign currency if they:
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Assume the UK financing rate is 10 per cent and that the financing rate in Germany is 9 per cent. An MNC would be indifferent between financing in pounds and financing in euros next year if the euro is expected to ____.
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Euronotes are underwritten by:
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Assume a UK-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8 per cent 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?
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If interest rate parity exists, financing with a foreign currency may still be feasible, but it would have to be conducted on an uncovered basis (i.e., without use of a forward hedge).
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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.
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