Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

According to the international Fisher effect:​

Accepted Answer

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. 
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 4

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.

Accepted Answer

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

Question 5

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:​

Accepted Answer

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

Question 6

Which of the following statements is false?​

Accepted Answer

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. 
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 7

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.

Accepted Answer

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

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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:​

Accepted Answer

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 
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 10

Which of the following is true?

Accepted Answer

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 
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 11

The international Fisher effect suggests that:​

Accepted Answer

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. 
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 12

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?​

Accepted Answer

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

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

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

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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:​

Accepted Answer

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

Question 17

Netting can achieve all but one of the following:​

Accepted Answer

A) Cross-border transactions between subsidiaries are reduced. 
B) Transaction costs are reduced. 
C) Currency conversion costs are reduced. 
D) Transaction exposure is eliminated. 
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 18

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

Accepted Answer

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. 
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 19

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

Accepted Answer

A) True 
 B)False

Question 20

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:​

Accepted Answer

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

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

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

According to the international Fisher effect:

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.

Which of the following statements is false?

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.

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.

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:

Which of the following is true?

The international Fisher effect suggests that:

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

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

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

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:

Netting can achieve all but one of the following:

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

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:

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

Filters

Exam 21: International Cash Management

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

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

According to the international Fisher effect:​

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.

Which of the following statements is false?​

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.

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.

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:​

Which of the following is true?

The international Fisher effect suggests that:​

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

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

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

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:​

Netting can achieve all but one of the following:​

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

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:​

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

Filters

According to the international Fisher effect:

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.

Which of the following statements is false?

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 international Fisher effect suggests that:

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

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:

Netting can achieve all but one of the following:

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: