Question 1

Since each subsidiary may be more concerned with its own operations than with the overall operations of the MNC, a centralized management group may need to monitor the parent-subsidiary and intersubsidiary cash flows.

Accepted Answer

As each subsidiary may be focused on its own operations, a centralized management group may need to monitor the cash flows among the parent and subsidiaries to ensure overall financial stability and effectiveness.

Question 2

Assume that interest rate parity holds. The U.S. one-year interest rate is 10% and the Australian one-year interest rate is 8%. What will the approximate effective yield be for an Australian citizen of a one-year deposit denominated in U.S. dollars? Assume the deposit is covered by a forward sale of dollars.

Accepted Answer

According to interest rate parity, the forward exchange rate should adjust to compensate for the difference in interest rates between two countries. Therefore, the Australian investor can expect to earn the same rate of return on a one-year investment in U.S. dollars as they would on a one-year investment in Australian dollars. Since the Australian one-year interest rate is 8%, the approximate effective yield for the Australian investor on a one-year deposit denominated in U.S. dollars would also be 8%.

Question 3

____ may complicate cash flow optimization.

Accepted Answer

Government restrictions can affect a company's ability to optimize their cash flow. For example, restrictions on foreign currency transactions or limitations on the amount of money that can be transferred out of the country can make it difficult to manage cash flow. The use of a zero-balance account and leading and lagging can actually help a company optimize cash flow by allowing them to better control their cash position and timing of payments.

Question 4

Exhibit 21-2
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% ringgit and 60% leu. Moore has identified the following information:
 
-Refer to Exhibit 21-2. What is the standard deviation of the portfolio contemplated by Moore Corporation?

Accepted Answer

The answer of Exhibit 21-2
Moore Corporation would like to simultaneously...

Question 5

Leading refers to the payment of supplies earlier than necessary; lagging refers to the payment of supplies later than allowed.

Accepted Answer

This is a correct definition of leading and lagging payments in the context of supply chain management.

Question 6

Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates may be preferable to a single point estimate.

Accepted Answer

This is true because exchange rate forecasts are subject to numerous economic and political factors that can change rapidly, making it difficult to predict a single point estimate with certainty. A probability distribution of possible exchange rates takes into account the range of potential outcomes and their likelihoods, providing a more comprehensive view of the possible outcomes.

Question 7

Exhibit 21-2
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% ringgit and 60% leu. Moore has identified the following information:
 
-Refer to Exhibit 21-2. What is the expected effective yield of the portfolio contemplated by Moore Corporation?

Accepted Answer

The answer of Exhibit 21-2
Moore Corporation would like to simultaneously...

Question 8

Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is $.205. If the spot rate of the rand at maturity of the investment is $.203, what is the effective yield of investing in rand?

Accepted Answer

First, we need to convert the initial investment of 1,500,000 rand to dollars:
1,500,000 rand x $0.205/rand = $307,500

At a nominal interest rate of 10%, the investment would be worth:
$307,500 x (1 + 0.10) = $338,250

At maturity, we need to convert the investment value back to dollars using the new spot rate:
$338,250 x $0.203/rand = 1,727,923.50 rand

So the effective yield is:
(1,727,923.50 rand / 1,500,000 rand)^(1/1) - 1 = 0.152 ^0.02 - 1 = 0.0289 or 2.89%

But this is the effective yield in rand. To get the effective yield in dollars, we need to convert the final value back to dollars using the new spot rate:
1,727,923.50 rand x $0.203/rand = $351,292.52

So the effective yield in dollars is:
($351,292.52 / $307,500)^(1/1) - 1 = 0.141 ^0.02 - 1 = 0.0289 or 2.89%

Therefore, the answer is B) 8.92%.

Question 9

Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of cross border transactions between subsidiaries.

Accepted Answer

The answer of Although netting typically increases the need for...

Question 10

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

Accepted Answer

Centralized cash management involves consolidating and managing the cash resources of an MNC in one location. When the MNC operates in multiple currencies, the process becomes more complex as the cash flows need to be converted into a single currency for management and decision-making purposes. This requires additional expertise and resources for currency risk management and hedging, and can also result in transaction costs and potential tax implications.

Question 11

Assume Costner Corporation, a U.S.-based MNC, invests 2,500,000 Zambian kwacha (ZMK) for a one-year period at a nominal interest rate of 9%. At the time the loan is extended, the spot rate of the kwacha is $.00060. If the spot rate of the kwacha in one year is $.00056, the dollar amount initially invested in Zambia is $____, and $____ are paid out after one year.

Accepted Answer

The dollar amount initially invested is 2,500,000 ZMK * $.00060 = $1,500. After one year, the investment grows to 2,500,000 ZMK * 1.09 = 2,725,000 ZMK. At the new spot rate of $.00056, the dollar amount paid out is 2,725,000 ZMK * $.00056 = $1,526.

Question 12

Lockboxes are post office box numbers assigned to employees for picking up their paychecks.

Accepted Answer

Lockboxes are secure storage mechanisms used by banks or institutions to receive payments or documents, not post office box numbers assigned to employees for picking up their paychecks.

Question 13

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

Accepted Answer

International money markets are a common choice for MNCs to invest their excess cash while retaining liquidity because they offer short-term borrowing and lending opportunities at low costs. This allows MNCs to invest their excess cash for short periods of time while still having the ability to access it quickly if needed. International bond and equity markets are typically used for longer-term investments and may not provide the same level of liquidity. The market for acquisitions is not an investment option, but rather a strategy for acquiring other companies.

Question 14

To ____, MNCs can use preauthorized payments.

Accepted Answer

Preauthorized payments can help MNCs in accelerating their cash inflows by allowing for automatic billing and collecting payments from customers on a pre-scheduled basis. This can reduce delays in receiving payments and ultimately improve cash flow for the company.

Question 15

In general, exchange rate fluctuations cause cash flows to be more volatile and uncertain.

Accepted Answer

Exchange rate fluctuations can impact the value of cash flows from foreign sources or in foreign currencies, making them more volatile and unpredictable. This can impact financial statements, investment decisions, and overall financial performance of businesses and individuals.

Question 16

Preauthorized payment is an arrangement that allows a corporation to charge a customer's bank account up to some limit.

Accepted Answer

Preauthorized payment is an arrangement where a customer grants permission to a corporation to withdraw funds from their bank account on a regular basis, up to a certain limit or until canceled by the customer.

Question 17

Assume that you forecast the value of the euro as follows for the next year:  If the interest rate on the euro is 12%, the expected effective yield from a euro-denominated deposit is:

Accepted Answer

The answer of Assume that you forecast the value of...

Question 18

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

Accepted Answer

It is actually ideal to have a portfolio of foreign currencies with low correlation, as this helps to reduce overall portfolio risk. Highly positively correlated currencies would move in the same direction, increasing risk and potentially limiting diversification benefits.

Question 19

A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic.

Accepted Answer

If purchases are international, the subsidiary may have to deal with fluctuating exchange rates, varying customs duties, and other factors that can impact the cost of goods and services over time. These uncertainties can make it harder to accurately forecast future outflow payments compared to domestic purchases where there is generally more stability in costs.

Question 20

A currency portfolio's variability depends on the standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.

Accepted Answer

This statement is true. The variability or risk of a currency portfolio is dependent on the standard deviations and paired correlations of effective yields of the individual currencies held in the portfolio.

Quiz 21: International Cash Management