When a US Firm Borrows a Foreign Currency and Has No Offsetting

question 9

Multiple Choice

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

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Definitions:

Purchasing Power

The amount of goods or services that one unit of currency can buy, often used to measure the impact of inflation.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, thus eroding purchasing power.

Nominal Rate of Interest

The stated interest rate of a bond or loan, which does not account for inflation or the compounding of interest.

Purchasing Power

The ability of an individual or entity to buy goods and services, essentially reflecting the value of money in terms of the quantity of goods or services it can buy.