Deck 21: International Cash Management

Question 1

According to the text:​

A)banks in the United States are prohibited from facilitating cash transfers for MNCs.
B)banks in most non-U.S. countries are more advanced than those in the United States 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

Answer 1

D

Question 2

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.

Answer 2

C

Question 3

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.

Answer 3

C

Question 4

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 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 5

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 6

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

Question 7

Netting can achieve all but one of the following:​

A)Cross-border transactions between subsidiaries are reduced.
B)Transaction costs are reduced.
C)Currency conversion costs are reduced.
D)Transaction exposure is eliminated.

Question 8

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 9

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.

Question 10

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 11

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 12

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 13

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 14

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 the above

Question 15

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 the answers above would have any impact on the probability of a foreign cash investment generating a higher effective yield than a U.S. investment.

Question 16

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 17

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 18

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 19

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.
a.True
b.False

Question 20

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 21

____ 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 22

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

Question 23

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 24

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

Question 25

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

Question 26

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 the above are techniques to optimize cash flows

Question 27

Assume that you forecast the value of the euro as follows for the next year:​
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 the above

Question 28

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

Question 29

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

Question 30

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

Question 31

Exhibit 21-1
To benefit from the low correlation between the Trinidad dollar and the Japanese yen (¥), Sciorra Corporation decides to invest 50 percent of total funds invested in Trinidad dollars and the remainder in yen. The domestic yield on a one-year deposit is 8 percent. The Trinidad one-year interest rate is 10 percent, and the Japanese one-year interest rate is 7 percent. Sciorra has determined the following possible percentage changes in the two individual currencies as follows:
​
Refer to Exhibit 21-1 above. 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 32

MNCs typically consider all but the following ____ when investing cash over a short-term period​

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

Question 33

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

Question 34

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 the above

Question 35

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)cannot answer without more information

Question 36

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

Question 37

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 38

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 39

Exhibit 21-1
To benefit from the low correlation between the Trinidad dollar and the Japanese yen (¥), Sciorra Corporation decides to invest 50 percent of total funds invested in Trinidad dollars and the remainder in yen. The domestic yield on a one-year deposit is 8 percent. The Trinidad one-year interest rate is 10 percent, and the Japanese one-year interest rate is 7 percent. Sciorra has determined the following possible percentage changes in the two individual currencies as follows:
​
Refer to Exhibit 21-1 above. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)?​

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

Question 40

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

Question 41

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 42

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)B and C

Question 43

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 44

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 45

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 46

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. 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.

Question 47

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

Question 48

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 49

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)zero percent.
B)5 percent.
C)8 percent.
D)13 percent.

Question 50

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.