If an MNC Borrows in a Foreign Currency and the Value

question 19

Multiple Choice

If an MNC borrows in a foreign currency and the value of that currency appreciates during the term of the loan:

• A)the MNC will not be affected because its obligations are established when the loan is made.
• B)the MNC can cancel the loan and refund the proceeds of the loan.
• C)the MNC will have to repay the principle and interest of the loan in a more valuable currency.
• D)the lender will have the option of canceling the loan.

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Definitions:

Cash Flow Matching

A strategy where an investor aims to align the cash flows from their investments with their anticipated liabilities or cash flow needs.

Annuity Holders

Individuals or entities that have invested in an annuity contract, which typically provides fixed or variable payments at regular intervals.

Insurance Company

A financial institution that provides various forms of insurance policies to protect individuals or businesses against risks in exchange for premiums.

Modified Duration

A measure of the sensitivity of a bond’s price to changes in interest rates, indicating how much the price will change as interest rates move.