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.

26. Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it borrows leu on a covered basis?

a.	10%.
b.	-10%.
c.	-1%.
d.	1%.
e.	none of the above

ANS: B

SOLUTION:	Forward discount: .00010/.00012 - 1 = -16.67%
	Effective financing rate: (1.08) ´ [1 + (-16.67%)] -1 = -10.00%.

PTS: 1

27. 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

ANS: D

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

PTS: 1

28. Assume that interest rate parity holds between the U.S. and Cyprus. The U.S. one-year interest rate is 7% and the Cyprus one-year interest rate is 6%. 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?

a.	6%.
b.	7%.
c.	1%.
d.	cannot answer without more information

ANS: B

SOLUTION:

When interest rate parity holds, the foreign financing cost (when covering with a forward hedge) is approximately equal to the domestic financing cost.

PTS: 1

29. Maston Corporation has forecasted the value of the Russian ruble 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%.
b.	32.86%.
c.	26.10%.
d.	none of the above

ANS: A

SOLUTION:

			Computation of
Effective Financing Rate		Probability	Expected Value
(1.30)( .95) - 1	= 23.50%	20%	4.70%
(1.30)( .97) - 1	= 26.10%	50%	13.05%
(1.30)(1.01) - 1	= 31.30%	30%	9.39%
			27.14%

PTS: 1

Exhibit 20-2

To benefit from the low correlation between the Canadian dollar (C$) and the Japanese yen (¥), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%. Luzar has determined the following possible percentage changes in the two individual currencies as follows:

Currency	Percentage Change	Probability
Canadian dollar	2.0%	30%
Canadian dollar	4.0%	70%
Japanese yen	-3.0%	60%
Japanese yen	1.0%	40%