Question 3 a) Explain what risks must be considered by multinational corporations (MNCs) when deciding their long-term financing strategy, and discuss how these risks may be managed. [13 per cent] b) James Inc is based in the USA but has a subsidiary in Switzerland. James Inc wishes to obtain a loan of 71 million euros for three years. A French company, Anton Cie, that has some operations in the USA wishes to obtain a US dollar loan of $100 million, also for three years. The current exchange rate is 0.71 euro = $1. James Inc has been offered a dollar loan at 5% and a euro loan at 3.0%. Anton Cie has been offered a dollar loan at 5.5% and a euro loan at 2.5%. Show how both companies can achieve cheaper foreign loans by entering into a fixed rate currency swap, and discuss the factors that both parties should consider before deciding to enter into the swap arrangement. [12 per cent]

Question 4 a) Discuss the reasons why multinational corporations may prefer to borrow a foreign currency rather than the home currency. What are the main criteria to be considered in deciding which currency, or currencies, to borrow? [11 per cent] b) Moffett plc is a UK-based firm that needs 500,000. The company is considering one-year financing with Swiss francs because the annual interest rate would be 1.5 per cent versus 5 percent in the United Kingdom. Moffett has no business in Switzerland and does not plan to cover its exposure. It is anticipated that the Swiss franc will appreciate over the coming year by either 6 per cent, 4 per cent, or 2 per cent, with equal probability of each occurrence. On the basis of this information, determine the probability distribution of the effective financing rate if Moffett decides to finance with Swiss francs and advise the company whether it should do so. [7 per cent] c) A multinational corporation is considering borrowing a portfolio of Japanese yen and US dollars to finance its operations. The following information is available concerning the mean effective financing rate of the two currencies:

	US dollar	Yen
Mean effective financing rate	2.5%	1.5%
Standard deviation of effective financing rate	0.05	0.07

Correlation coefficient of effective financing rates for US$ and Yen (0.23)

Calculate the mean effective rate on a portfolio of funds financed 60% by US dollars and 40% by Japanese yen. Calculate also the variance and standard deviation of the portfolio. [7 per cent]