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. What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis?

a) 10%

b) - 10%

c) - 1%

d) 1%

e) None of the above

Question

Business

Claire Roberts

5 June, 08:18

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. What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis?

a) 10%

b) - 10%

c) - 1%

d) 1%

e) None of the above

+1

Answers (1)

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Miah · Answer 1

c. - 1

Explanation:

Base on the scenario been described in the question, we can use the following method to solve the given problem

Solution:

Depreciation of leu:.00010/.00011 - 1

Depreciation of leu = - 9.09%

Effective financing rate: (1.08) x [1 + (-9.09%) ] - 1 = - 1.82%.28.