Deck 21: International Cash Management

Question 1

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 1

D

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

D

Question 4

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 nonU.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 5

According to _______,the effective yield earned by U.S.investors will be the same as the effective yield earned by nonU.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 the above

Question 6

According to the international Fisher effect:

A) exchange rates adjust to compensate for income differen tials between countries.
B) interest rates adjust to compensate for income differen tials between countries.
C) exchange rates adjust to compensate for interest rate differentials between countries.
D) exchange rates adjust to compensate for risk differ entials between countries.

Question 7

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.

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

Question 8

Assume that a U.S.firm considers investing in British oneyear Treasury securities.  The interest rate on these securities is 12%,while the interest rate on the same securities in the U.S.is 10%.  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 9

The Mexican oneyear interest rate is 27 percent,while the U.S.oneyear interest rate is 9 percent.  If a U.S.firm creates a oneyear deposit in Mexico,the Mexican peso would have to _______ against the U.S.dollar by _______ in order to make that investment have an effective yield that is achievable in the U.S.

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

Question 10

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 11

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 12

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 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

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.

Question 15

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

A) 14.45%.
B) 4.45%.
C) 14.00%.
D)4.00%.

Question 16

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 17

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) A and B
D) none of the above

Question 18

According to the text:

A) banks in most non U.S. countries are as capable as the U.S. in facilitating cash transfers and most other cash management operations for MNCs.
B) banks in most non U.S. countries are more advanced than the U.S. in facilitating cash transfers for MNCs.
C) an MNC with subsidiaries in several different countries has no problems in coordinating its cash transfers since a uniform global banking system exists.
D) none of the above

Question 19

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 20

Assume the U.S.oneyear interest rate is 11% and the French oneyear interest rate is 18%.  The breakeven level of depreciation in the euro at which the U.S.and French investments would exhibit the same return to a U.S.investor is:

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

Question 21

What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)

A) 6.47%.
B) 8.84%.
C) 8.50%.
D) none of the above

Question 22

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

Question 23

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.

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

Question 24

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 25

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 26

What is the probability that the yield of the two-currency portfolio is less than the domestic yield

A) .1575.
B) .35.
C) .6425.
D) 1.
E) none of the above

Question 27

___________________ 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 28

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%,the expected effective yield from a euro-denominated deposit is:

A) 15.36%.
B) 15.70%.
C) 12.00%.
D) 14.35%.
E) none of the above

Question 29

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

Question 30

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 31

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

Question 32

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

Question 33

What is the standard deviation of the portfolio contemplated by Moore Corporation

A) .624%.
B) 7.950%.
C) 1.040%.
D) 10.200%.
E) none of the above

Question 34

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

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.

Question 36

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

A) 11.08%.
B) 8.92%.
C) 10.00%.
D) none of the above

Question 37

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

Question 38

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