Question 1

In what is known as dynamic hedging, banks periodically hedge those currencies expected to move unfavourably and remove currencies that are expected to move favourably.

Accepted Answer

The answer of In what is known as dynamic hedging,...

Question 2

Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate of 10 per cent. At the time the investment is made, the spot rate of the rand is £0.114. If the spot rate of the rand at maturity of the investment is £0.111, what is the effective yield of investing in rand?

Accepted Answer

The effective yield considers both the nominal interest rate and the change in the exchange rate. The nominal interest rate is 10%, but the rand depreciates from £0.114 to £0.111. The effective yield is calculated as (1 + nominal interest rate) * (final exchange rate / initial exchange rate) - 1 = (1 + 0.10) * (0.111 / 0.114) - 1 = 7.11%.

Question 3

A common purpose of inter-subsidiary leading or lagging strategies is to:

Accepted Answer

Inter-subsidiary leading or lagging strategies are commonly used to allow subsidiaries with excess funds to provide financing to subsidiaries with deficient funds. This helps to optimize the use of resources within the company and ensures that subsidiaries are able to meet their financial obligations. Other strategies, such as adjusting inventory levels or changing prices based on tax rates, may also be used, but the primary purpose of these strategies is not to facilitate financing between subsidiaries. Similarly, measuring the performance of subsidiaries based on how quickly they remit dividend payments to the parent is not directly related to inter-subsidiary financing.

Question 4

Assume that there are several foreign currencies that exhibit a higher interest rate than the UK interest rate. The UK firm has a higher probability of generating a higher effective yield on a portfolio of currencies (relative to the domestic yield) if:

Accepted Answer

Low correlations between foreign currency movements against the UK pound reduce the risk of simultaneous adverse movements, potentially leading to a higher effective yield on a diversified currency portfolio.

Question 5

Moore Corporation would like to simultaneously invest in Malaysian ringgit (MYR) and Romanian leu (ROL) for a three-month period. Moore would like to determine the expected yield and the variance of a portfolio consisting of 40 per cent ringgit and 60 per cent leu. Moore has identified the following information: Mean effective financing rate of Malaysian ringgit for three months 3 per cent Mean effective financing rate of Romanian leu for three months 2 per cent Standard deviation of Malaysian ringgit's effective financing rate 0.15 Standard deviation of Romanian leu's effective financing rate 0.07 Correlation coefficient of effective financing rates of these two currencies 0.19 What is the standard deviation of the portfolio contemplated by Moore Corporation?

Accepted Answer

The answer of Moore Corporation would like to simultaneously invest...

Question 6

Assume that a UK investor invests in a US CD offering a six-month interest rate of 5 per cent. Over this six-month period, the dollar depreciates by 9 per cent. The effective yield on the US CD for the UK investor is:

Accepted Answer

The effective yield for the UK investor is calculated by considering both the interest earned and the currency depreciation. The interest rate is 5%, but the dollar depreciates by 9%, resulting in a net loss of 4%. The effective yield is calculated as (1 + 0.05) * (1 - 0.09) - 1 = -3.54%.

Question 7

Centralized cash management is more complicated when the MNC uses multiple currencies.

Accepted Answer

Centralized cash management involves consolidating all financial transactions of the MNC into one central account. When the MNC uses multiple currencies, it becomes more complicated to manage cash flow, foreign currency exchange, and hedging strategies. Different currencies may have different values and fluctuate in value at different rates, making it challenging to optimize cash management across various currencies. Therefore, centralized cash management is more complicated when the MNC uses multiple currencies.

Question 8

When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated.

Accepted Answer

It is generally recommended to diversify a currency portfolio with currencies that have low or negative correlation to reduce the overall risk of the portfolio. This is because high positive correlation means that the currencies move in the same direction, which can lead to increased volatility and potential losses if an adverse event affects all currencies in the portfolio.

Question 9

The most useful measure of an MNC's liquidity is its:

Accepted Answer

The most useful measure of an MNC's liquidity is its potential access to funds. This encompasses not only the cash and securities the company currently holds but also its ability to quickly obtain cash through various means if needed, providing a more comprehensive view of its liquidity.

Question 10

Generally, if interest rate parity holds and the forward rate is an unbiased predictor of the future spot rate, then the international Fisher effect will also hold.

Accepted Answer

If interest rate parity holds and the forward rate is an unbiased predictor of the future spot rate, it means that the expected returns on two currencies should be equalized. This implies that any differences in interest rates between countries should be offset by an equal and opposite change in the exchange rate. If this holds, it also suggests that the international Fisher effect will hold, which states that the difference in nominal interest rates between two countries should be equal to the difference in their expected inflation rates.

Question 11

According to the international Fisher effect:

Accepted Answer

The international Fisher effect states that exchange rates between countries should adjust to compensate for differences in nominal interest rates between those countries. In other words, if one country has a higher interest rate than another, its currency should appreciate relative to the other country's currency to equalize the returns on investments for international investors.

Question 12

MNCs often use ____ to invest excess cash while retaining liquidity.

Accepted Answer

International money markets are designed to allow institutions to invest excess cash for short periods of time while maintaining liquidity. This makes them a popular choice for MNCs looking to invest excess cash. Option A and B refer to longer-term investments in bonds and stocks, respectively, which may not be the best choice for retaining liquidity. Option D refers to the market for acquiring other companies, which is not necessarily a place where MNCs would invest excess cash.

Question 13

According to ____, the effective yield earned by euro investors will be the same as the effective yield earned by non-euro investors in any given period.

Accepted Answer

The answer of According to ____, the effective yield earned...

Question 14

Moore Corporation would like to simultaneously invest in Malaysian ringgit (MYR) and Romanian leu (ROL) for a three-month period. Moore would like to determine the expected yield and the variance of a portfolio consisting of 40 per cent ringgit and 60 per cent leu. Moore has identified the following information: Mean effective financing rate of Malaysian ringgit for three months 3 per cent Mean effective financing rate of Romanian leu for three months 2 per cent Standard deviation of Malaysian ringgit's effective financing rate 0.15 Standard deviation of Romanian leu's effective financing rate 0.07 Correlation coefficient of effective financing rates of these two currencies 0.19. What is the expected effective yield of the portfolio contemplated by Moore Corporation?

Accepted Answer