FIN 4604: Sample Questions III

1). 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% e) 14%

2). Assume that the U.S. interest rate is 11% while the interest rate on euros 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; 3.74% b) Appreciate; 3.74% c) Appreciate; 4.53% d) Depreciate; 4.53%

3). 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

4). If a firm repeatedly borrows a portfolio of foreign currencies, 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

5). Assume the annual British interest rate is above the annual U.S. interest rate (iuk > ius). Also assume the pound’s forward rate of $1.75 equals the pound’s current spot rate. Given this information, interest rate parity ________ exist, and the U.S. firm _________ lock in a higher return by investing in pounds for one year. a) Does; could b) Does; could not c) Does not; could not d) Does not; could

6). A risk-averse firm would