Deck 19: International Cash Management

Question 1

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 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.

Answer 1

A

Question 2

Netting can achieve all but one of the following:

A) cross-border transactions between subsidiaries are reduced.
B) transactions costs are reduced.
C) currency conversion costs are reduced.
D) transaction exposure is eliminated.

Answer 2

D

Question 3

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

A) 10%
B) 8%
C) 2%
D) Cannot answer without more information.

Answer 3

B

Question 4

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 5

Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the US interest rate. If non-US firms invested in US 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 6

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

Question 7

The Turkish one-year interest rate is 27 per cent, while the UK one-year interest rate is 9 per cent. If a UK firm creates a one-year deposit in Turkey, the turkish lira would have to ____ against the pound by ____ in order to make that investment have an effective yield that is at least as great as in the UK.

A) appreciate; about 18%
B) depreciate; about 36%
C) depreciate; about 14%
D) appreciate; about 14%
E) depreciate; 8.5%

Question 8

Assume Costner plc, a UK-based MNC, invests 2,500,000 Zambian kwacha (ZMK) for a one-year period at a nominal interest rate of 9 per cent. At the time the loan is extended, the spot rate of the kwacha is £0.00033. If the spot rate of the kwacha in one year is £0.00030, the pound amount initially invested in Zambia is £____, and £____ are paid out after one year.

A) 825; 817
B) 825; 905
C) 784; 823
D) 562; 617

Question 9

Assume the UK one-year interest rate is 11 per cent and the French one-year interest rate is 18 per cent. The break-even level of depreciation in the euro at which the UK and French investments would exhibit the same return to a UK investor is:

A) about 5.1%.
B) about 6.8%.
C) about 6.3%.
D) about 5.9%.

Question 10

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

Question 11

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 12

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

Question 13

Which of the following is true?

A) Some countries may prohibit netting.
B) Some countries may prohibit forms of leading and lagging.
C) A and B
D) None of the above

Question 14

____ may complicate cash flow optimization.

A) The use of a zero-balance account
B) Government restrictions
C) Leading and lagging
D) None of the above

Question 15

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

A) UK firms could have achieved a higher effective yield on foreign deposits than on UK deposits during those periods.
B) the international Fisher effect is supported by the results.
C) A and B
D) none of the above.

Question 16

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

Question 17

If the international Fisher effect (IFE) exists, then a UK 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 UK deposit.
B) invest in the UK deposits since they will, on average, generate higher effective yields than a foreign deposit.
C) invest in the UK 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 UK deposit.

Question 18

Assume that Subsidiaries X and Y often trade with each other. Assume that Subsidiary X has excess cash while Subsidiary Y is short on cash. How can Subsidiary X help out 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) A and B
D) None of the above

Question 19

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

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

Question 20

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

Question 21

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.

Question 22

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?

A) 11.08%
B) 7.11%
C) 10.00%
D) None of the above

Question 23

A common purpose of inter-subsidiary 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 24

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:

A) the foreign currency movements against the UK pound are highly correlated.
B) the foreign currency movements against the UK pound are perfectly positively correlated.
C) the foreign currency movements against the UK pound exhibit low correlations.
D) none of the answers above would have any impact on the probability of a foreign cash investment generating a higher effective yield than a UK investment.

Question 25

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?

A) 0.624%.
B) 7.950%.
C) 1.040%.
D) 10.200%.
E) None of the above

Question 26

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:

A) 14.54 %.
B) -3.54%.
C) 14.00%.
D) +3.54%.

Question 27

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

Question 28

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

Question 29

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 30

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 31

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 32

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

A) international bond markets
B) international equity markets
C) international money markets
D) the market for acquisitions

Question 33

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.

A) interest rate parity (IRP)
B) the international Fisher effect (IFE)
C) purchasing power parity (PPP)
D) none of the above

Question 34

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?

A) 2.50%
B) 2.60%
C) 2.40%
D) None of the above

Question 35

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