Deck 21: International Cash Management

Question 1

A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic.
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Answer 1

True

Question 2

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

Answer 2

True

Question 3

When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated.
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Answer 3

False

Question 4

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

Question 5

An MNC that uses a strategy of dynamic hedging will apply a hedge when it expects a foreign currency that it holds to appreciate, and it will remove the hedge when it expects the currency to depreciate.

Question 6

The Swiss one-year interest rate is 7 percent, while the U.S. one-year interest rate is 2 percent. Assume that interest rate parity exists. If a U.S. firm invests in a Swiss one-year deposit and sells Swiss francs forward with a forward contract to hedge its exchange rate exposure, the effective yield from investing in a one-year deposit in Switzerland will be about:

A) ​9 percent.
B) ​7 percent.
C) ​4 percent.
D) ​2 percent.

Question 7

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

Question 8

Leading refers to paying for supplies earlier than necessary; lagging refers to delaying the payment for supplies.
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Question 9

​The effective yield of investing in a foreign currency depends on both the ____ and the ____ of the foreign currency.

A) ​inflation rate; exchange rate movements
B) ​income level; interest rates
C) ​interest rate; exchange rate movements
D) ​interest rate; amount invested

Question 10

Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates may be preferable to a single point estimate.
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Question 11

In what is known as dynamic hedging, banks always hedge open positions in any foreign currencies.

Question 12

Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of cross-border transactions between subsidiaries.
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Question 13

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.

Question 14

An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2 percent. If the Singapore dollar appreciates by less than 2 percent, the investment in Singapore will be more attractive.

Question 15

In a bilateral netting system, transactions between the parent and a subsidiary or between two subsidiaries are consolidated over a specific period of time.

Question 16

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.

Question 17

The use of lockboxes is a way of accelerating cash inflows.

Question 18

When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated if the goal is to reduce exchange rate risk.

Question 19

The international Fisher effect suggests that:​

A) ​the effective yield on short-term foreign securities should, on average, equal the yield on short-term domestic securities.
B) ​the effective yield on short-term securities of high-inflation countries is greater than the yield on short-term domestic securities.
C) ​if domestic income grows faster than foreign income, the effective yield on short-term foreign securities is higher than the yield on short-term domestic securities.
D) ​if foreign tax rates equal domestic tax rates, the exchange rates of different currencies will change by the same degree.

Question 20

If interest rate parity holds and the forward rate is expected to be an unbiased forecast of the future spot rate, then an uncovered investment in a foreign deposit will on average earn a similar effective yield as an investment in a domestic deposit.

Question 21

Which of the following is not typically considered by MNCs when investing cash over a short-term period?

A) large deposits at commercial banks
B) Treasury bills
C) commercial paper
D) foreign stocks

Question 22

A ____ allows customers to send payments to a post office box.​

A) ​bilateral netting system
B) ​multilateral netting system
C) ​lockbox
D) ​preauthorized payment

Question 23

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

A) cash balance.
B) amount of securities held as investments.
C) political risk rating.
D) potential access to funds.

Question 24

Which of the following is true?

A) Some countries may prohibit netting.
B) Some countries may prohibit forms of leading and lagging.
C) Some countries may prohibit netting AND some countries may prohibit forms of leading and lagging.
D) None of these are correct.

Question 25

Assume Scarlett 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 percent. 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.

A) 1,500; 1,526
B) 1,526; 1,500
C) 1,500; 1,400
D) 1,400; 1,500

Question 26

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

A) interest rate parity (IRP)
B) the international Fisher effect (IFE)
C) purchasing power parity (PPP)
D) None of these are correct.

Question 27

Which of the following cannot be achieved by netting?

A) reduction of cross-border transactions
B) reduction of transaction costs
C) reduction of currency conversion costs
D) elimination of transaction exposure

Question 28

To ____, MNCs can use preauthorized payments.​

A) ​accelerate cash inflows
B) ​minimize currency conversion costs
C) ​manage blocked funds
D) ​manage intersubsidiary cash transfers

Question 29

Matis Corporation invests 1,500,000 South African rand at a nominal interest rate of 10 percent. 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?

A) 11.08 percent
B) 8.92 percent
C) 10.00 percent
D) None of these are correct.

Question 30

A common purpose of intersubsidiary leading or lagging strategies is to:

A) allow subsidiaries with excess funds to provide financing to subsidiaries with deficient funds.
B) assure that the inventory levels at subsidiaries are maintained within tolerable ranges.
C) change the prices a high-tax-rate subsidiary charges a low-tax-rate subsidiary.
D) measure the performance of subsidiaries according to how quickly subsidiaries remit dividend payments to the parent.

Question 31

If a foreign currency consistently depreciated against the dollar over several periods and had lower interest rates at the beginning of those periods than the U.S. interest rates, then:

A) U.S. firms could have achieved a higher effective yield on foreign deposits than on U.S. deposits during those periods.
B) the international Fisher effect is supported by the results.
C) U.S. firms could have achieved a higher effective yield on foreign deposits than on U.S. deposits during those periods AND the international Fisher effect is supported by the results.
D) None of these are correct.

Question 32

According to the international Fisher effect:​

A) ​exchange rates adjust to compensate for income differentials between countries.
B) ​interest rates adjust to compensate for income differentials between countries.
C) ​exchange rates adjust to compensate for interest rate differentials between countries.
D) ​exchange rates adjust to compensate for risk differentials between countries.

Question 33

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

A) 10 percent
B) 8 percent
C) 2 percent
D) This question cannot be answered without more information.

Question 34

If interest rate parity does not hold, and the forward ____ is greater than the interest rate differential, then covered interest arbitrage is feasible for investors residing in the ____ country.

A) premium; home
B) discount; home
C) premium; foreign
D) discount; home AND premium; foreign

Question 35

Assume that a U.S. firm considers investing in British one-year Treasury securities. The interest rate on these securities is 12 percent, while the U.S. interest rate on the same securities is 10 percent. The firm believes that today's spot rate is an appropriate forecast for the spot rate of the pound in one year. Based on this information, the effective yield on British securities from the U.S. firm's perspective is:​

A) ​equal to the U.S. interest rate.
B) ​equal to the British interest rate.
C) ​lower than the U.S. interest rate.
D) ​higher than the British interest rate.
E) ​lower than the British interest rate, but higher than the U.S. interest rate.

Question 36

The Thai one-year interest rate is 10 percent, while the U.S. one-year interest rate is 4 percent. Assume that interest rate parity exists. If a U.S.-based MNC uses the forward rate to forecast the exchange rate of the Thai baht in one year, the expected effective yield from investing in a one-year deposit in Thailand is:

A) 14 percent.
B) 10 percent.
C) 4 percent.
D) 6 percent.

Question 37

If the international Fisher effect (IFE) exists, then a U.S. firm that has access to banks offering high interest rates in deposits denominated in foreign currencies should:​

A) ​invest in the foreign deposits since they will, on average, generate higher effective yields than a U.S. deposit.
B) ​invest in the U.S. deposits since they will, on average, generate higher effective yields than a foreign deposit.
C) ​invest in the U.S. deposits since they will, on average, generate similar effective yields as a foreign deposit.
D) ​invest in the foreign deposits since they will, on average, generate similar effective yields as a U.S. deposit.

Question 38

Assume that a U.S. investor invests in a British CD offering a six-month interest rate of 5 percent. Over this six-month period, the pound depreciates by 9 percent. The effective yield on the British CD for the U.S. investor is:

A) 14.45 percent.
B) -4.45 percent.
C) 14.00 percent.
D) -4.00 percent.

Question 39

Which of the following is not a technique to optimize cash flows?

A) Accelerate cash inflows.
B) Minimize currency conversion costs.
C) Manage blocked funds.
D) All of these are techniques to optimize cash flows.

Question 40

If interest rate parity exists, and the forward rate is an accurate forecast of the future spot rate:

A) an uncovered investment in a foreign deposit is not worthwhile.
B) an investment in a foreign deposit will earn a higher effective yield than an investment in a domestic deposit.
C) an investment in a foreign deposit will be worthwhile if the foreign inflation rate exceeds the domestic inflation rate.
D) None of these are correct.

Question 41

Which of the following statements is false?​

A) ​If interest rate parity exists, covered interest arbitrage is not worthwhile.
B) ​If interest rate parity holds and the forward rate is an accurate forecast of the future spot rate, an uncovered investment in a foreign security is not worthwhile.
C) ​If interest rate parity exists and the forward rate is an unbiased forecast of the future spot rate, an uncovered investment in a foreign security will on average earn an effective yield similar to an investment in a domestic security.
D) ​If interest rate parity exists and the forward rate is expected to underestimate the future spot rate, an uncovered investment in a foreign security is expected to earn a lower effective yield than an investment in a domestic security.

Question 42

Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during this period, their effective yield would have been:​

A) ​negative.
B) ​zero.
C) ​positive, but less than the interest rate of their respective countries.
D) ​more than the interest rate of their respective countries.

Question 43

Assume that Subsidiaries X and Y of the same MNC often trade with each other. Assume that Subsidiary X has excess cash while Subsidiary Y is short on cash. How can Subsidiary X help Subsidiary Y?

A) X should lag its payments sent to Y to pay for imports from Y.
B) X should request that Y lead its payments to be sent for goods that Y sent to X.
C) X should lag its payments sent to Y to pay for imports from Y AND X should request that Y lead its payments to be sent for goods that Y sent to X.
D) None of these are correct.
Answer Key

Question 44

Assume the U.S. one-year interest rate is 5 percent, while the South African one-year interest rate is 13 percent. If a U.S. firm invests in a South African one-year deposit, and the South African rand remains constant over the next year, the U.S. firm will earn an effective yield of:

A) 0 percent.
B) 5 percent.
C) 8 percent.
D) 13 percent.

Question 45

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

A) the foreign currency movements against the U.S. dollar are highly correlated.
B) the foreign currency movements against the U.S. dollar are perfectly positively correlated.
C) the foreign currency movements against the U.S. dollar exhibit low correlations.
D) None of these are correct.

Question 46

Which of the following is a strategy than an MNC might use when the host country where a subsidiary is located imposes restrictions blocking the transfer of funds from the country?

A) Instruct the subsidiary to set up a research and development division to use funds within the host country.
B) Use transfer pricing in a manner that will increase the expenses incurred by the subsidiary.
C) Instruct the subsidiary to obtain financing from a local bank in the host country.
D) All of these are strategies that an MNC might use when the host country where a subsidiary is located imposes restrictions blocking the transfer of funds from the country.

Question 47

Assume that you forecast the value of the euro as follows for the next year: ​
Percentage Change
Probability of Occurrence
-2%
30%
3%
40%
5%
30%
​
If the interest rate on the euro is 12 percent, the expected effective yield from a euro-denominated deposit is:

A) 15.36 percent.
B) 15.70 percent.
C) 12.00 percent.
D) 14.35 percent.
E) None of these are correct.

Question 48

The Mexican one-year interest rate is 9 percent, while the U.S. one-year interest rate is 3 percent. Assume that interest rate parity exists. If a U.S. firm uses the forward rate to forecast the exchange rate of the peso in one year, the expected effective yield from investing in a one-year deposit in Mexico is:​

A) ​12 percent.
B) ​9 percent.
C) ​3 percent.
D) ​6 percent.