Consider a U.S.MNC with three subsidiaries and the following foreign exchange transactions shown at left.Use MULTILATERAL netting WITH A CENTRAL DEPOSITORY to reduce the number of foreign exchange transactions.
D)None of the above

Question

Consider a U.S.MNC with three subsidiaries and the following foreign exchange transactions shown at left.Use MULTILATERAL netting WITH A CENTRAL DEPOSITORY to reduce the number of foreign exchange transactions. 
D)None of the above

Quizplus · Accepted Answer

Using multilateral netting with a central depository, we can reduce the number of transactions to be settled. In this case, we can see that Subsidiary A owes Subsidiary B $500,000, Subsidiary A owes Subsidiary C $1,000,000, and Subsidiary B owes Subsidiary C $750,000. By using multilateral netting, we can offset these transactions as follows:

- Subsidiary A pays its net amount of $1,500,000 (i.e. $500,000 owed to Subsidiary B and $1,000,000 owed to Subsidiary C) to the central depository.
- Subsidiary B receives $500,000 from the central depository (i.e. the net amount owed by Subsidiary A).
- Subsidiary C receives $1,000,000 from the central depository (i.e. the net amount owed by Subsidiary A).

As a result, we only need to settle one transaction instead of three, which reduces the costs and the risks associated with foreign exchange transactions. Option B is the best choice as it reflects this approach.