Exhibit 20-3

Cameron Corporation 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% yen and 70% dinar. Cameron has gathered the following information:

Mean effective financing rate of Japanese yen for six months	4%
Mean effective financing rate of Sudanese dinar for six months	1%
Standard deviation of Japanese yen's effective financing rate	.10
Standard deviation of Sudanese dinar's effective financing rate	.20
Correlation coefficient of effective financing rates of these two currencies	.23

32. Refer to Exhibit 20-3. What is the expected financing rate of the portfolio contemplated by Cameron Corporation?

a.	3.10%.
b.	1.90%.
c.	17.00%.
d.	13.00%.
e.	none of the above

ANS: B

SOLUTION:

(.3)(4%) + (.7)(1%) = 1.90%.

PTS: 1

33. Refer to Exhibit 20-3. What is the expected standard deviation of the portfolio contemplated by Cameron?

a.	2.24%.
b.	14.98%.
c.	2.89%.
d.	17.00%.
e.	none of the above

ANS: B

SOLUTION:

PTS: 1

34. 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).

a. True

b. False

ANS: T PTS: 1

35. Firms that believe the forward rate is an unbiased predictor of the future spot rate will prefer borrowing the foreign currency.

a. True

b. False

ANS: F PTS: 1

36. 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.

a. True

b. False

ANS: T PTS: 1

37. One reason an MNC may consider foreign financing is that the proceeds could be used to offset a foreign net payables position.

a. True

b. False

ANS: F PTS: 1

38. A negative effective financing rate implies that the U.S. firm actually paid fewer dollars in total loan repayment than the number of dollars borrowed.

a. True

b. False

ANS: T PTS: 1

39. 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.

a. True

b. False

ANS: F PTS: 1

40. The interest rate of euronotes is based on the T-bill rate.

a. True

b. False

ANS: F PTS: 1

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

a.	high; low
b.	low; high
c.	high; high
d.	A and B are correct

ANS: C PTS: 1

42. 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?

a.	1.92%
b.	2.00%
c.	6.08%
d.	none of the above

ANS: A

SOLUTION:

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

PTS: 1

43. A negative effective financing rate indicates that an MNC:

a.	paid only a small amount in interested over and above the amount borrowed.
b.	has been negatively affected by a large appreciation of the foreign currency.
c.	actually paid fewer dollars to repay the loan than it borrowed.
d.	would have been better off borrowing in the U.S.

ANS: C PTS: 1

44. 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.

a.	lower than
b.	greater than
c.	similar to
d.	none of the above

ANS: C PTS: 1

45. 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.

a.	lower than
b.	greater than
c.	similar to
d.	none of the above

ANS: C PTS: 1

46. 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 ____.

a.	appreciate by 0.92%.
b.	depreciate by 0.92%.
c.	appreciate by 1.00%.
d.	depreciate by 1.00%.

ANS: A

SOLUTION:

1.10/1.09 - 1 = 0.92%

PTS: 1

47. 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.

a.	are higher than; higher than
b.	can be lower or higher than; higher than
c.	can be lower or higher than; lower than
d.	are lower than; higher than

ANS: B PTS: 1

48. 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.

a. True

b. False

ANS: F PTS: 1

49. An MNC's parent or subsidiary in need for funds commonly determines whether there are any available internal funds before searching for outside funding.

a. True

b. False

ANS: T PTS: 1

50. A large firm may finance in a foreign currency to offset a net payable position in that foreign country.

a. True

b. False

ANS: F PTS: 1

51. 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.

a. True

b. False

ANS: F PTS: 1

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

a.	Canadian dollars offer a lower interest rate than available in the U.S. and are expected to appreciate over the maturity of the loan.
b.	Australian dollars offer a lower interest rate than available in the U.S. and are expected to depreciate over the maturity of the loan.
c.	A U.S. firms has net receivables in Cyprus pounds.
d.	A and C.
e.	None of the above

ANS: A PTS: 1

53. Which of the following statement is false?

a.	If interest rate parity holds, foreign financing a simultaneous hedge of that position in the forward market will result in financing costs similar to those in domestic financing.
b.	If interest rate parity holds, and the forward rate is an accurate forecast of the future spot rate, uncovered foreign financing will result in financing costs similar to those in domestic financing.
c.	If interest rate parity holds, and the forward rate is expected to overestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.
d.	If interest rate parity holds, and the forward rate is expected to underestimate the future spot rate, uncovered foreign financing is expected to result in lower financing costs than those in domestic financing.

ANS: D PTS: 1

54. 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

a.	premium; higher than
b.	discount; higher than
c.	premium; less than
d.	A and B

ANS: A PTS: 1

55. 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.

a.	depreciates; 3.54
b.	appreciates; 3.54
c.	depreciates; 3.67
d.	appreciates; 3.67

ANS: A PTS: 1

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