Assume That Interest Rate Parity Holds Between the UK and Cyprus

question 18

Multiple Choice

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?

• A) 6%.
• B) 7%.
• C) 1%.
• D) Cannot answer without more information

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Definitions:

Check Register

A record of checks written, deposits made, and balances in a checking account.

Vouchers Payable

An accounting term that represents the obligation of a business to pay for goods or services that have been received, but not yet paid for.

Purchases Discount

A contra-cost account in the general ledger that records discounts offered by vendors of merchandise for prompt payment of purchases by buyers.

Merchandise

Goods brought into a store for resale to customers.