Exam 21: International Cash Management

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:

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.

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.

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

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:

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

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:​

Which of the following cannot be achieved by netting?

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.

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.

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.

The international Fisher effect suggests that:​

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

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

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:

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

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

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:​

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?