Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

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 D

Question 3

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.

Accepted Answer

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

Question 4

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.

Accepted Answer

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

Question 5

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?

Accepted Answer

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

Question 6

Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is $0.205. If the spot rate of the rand at maturity of the investment is $0.203, what is the effective yield of investing in rand?

Accepted Answer

A)  11.08% 
B)  8.93% 
C)  10.00% 
D)  None of the above 
A)  11.08% 
B)  8.93% 
C)  10.00% 
D)  None of the above

Question 7

Assume the U.S. one-year interest rate is 15%, while the South African one-year interest rate is 13%. If the South African rand ____ by ____%, a U.S.-based MNC is indifferent between investing in dollars and investing in rand.

Accepted Answer

A)  depreciates; 1.77 
B)  appreciates; 1.74 
C)  appreciates; 1.77 
D)  depreciates; 1.74 
A)  depreciates; 1.77 
B)  appreciates; 1.74 
C)  appreciates; 1.77 
D)  depreciates; 1.74

Question 8

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:

Accepted Answer

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. 
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 9

Exhibit 21-1
To benefit from the low correlation between the Trinidad dollar and the Japanese yen (¥), Sciorra Corporation decides to invest 50% of total funds invested in Trinidad dollars and the remainder in yen. The domestic yield on a one-year deposit is 8%. The Trinidad one-year interest rate is 10% and the Japanese one-year interest rate is 7%. Sciorra has determined the following possible percentage changes in the two individual currencies as follows:
 $\begin{array} { l c c } 
\text { \underline{Currency }} & \text { \underline{Percentage Change }} & \text { \underline{Prabability }} \
\text { Trinidad dollar } & - 1.0 \% & 35 \% \
\text { Trinidad dollar } & 2.0 \% & 65 \% \
\text { Japanese yen } & - 2.0 \% & 45 \%\
\text { Japanese yen } & 1.0 \% & 55\%
\end{array}$
-Refer to Exhibit 21-1. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another)?

Accepted Answer

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

Question 10

Assume that a U.S. firm considers investing in British one-year 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:

Accepted Answer

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. 
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 11

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

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

A currency portfolio's variability depends on the standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Exhibit 21-2
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% ringgit and 60% leu. Moore has identified the following information:
$\begin{array}{c}
\begin{array}{lll}
\text {Mean effective financing rate of Malaysian ringgit for three months}\
\text { Mean effective financing rate of Romanian leu for three months   }\
\text {Standard deviation of Malaysian ringgit's effective financing rate  }\
\text {Standard deviation of Romanian leu's effective financing rate }\
\text { Correlation coefficient of effective financing rates of these two currencies } 
\end{array}
\begin{array}{c}
3 \% \
2 \% \
.15 \
.07 \
.19 
\end{array}
\end{array}$ 
-Refer to Exhibit 21-2. What is the expected effective yield of the portfolio contemplated by Moore Corporation?

Accepted Answer

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

Question 17

Netting can achieve all but one of the following:

Accepted Answer

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

Question 18

An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive.

Accepted Answer

A) True 
 B)False

Question 19

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 20

The most useful measure of an MNC's liquidity is its:

Accepted Answer

A)  cash balance. 
B)  amount of securities held as investments. 
C)  political risk rating. 
D)  potential access to funds. 
A)  cash balance. 
B)  amount of securities held as investments. 
C)  political risk rating. 
D)  potential access to funds.

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

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:

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?

Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is $0.205. If the spot rate of the rand at maturity of the investment is $0.203, what is the effective yield of investing in rand?

Assume the U.S. one-year interest rate is 15%, while the South African one-year interest rate is 13%. If the South African rand by %, a U.S.-based MNC is indifferent between investing in dollars and investing in rand.

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:

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

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.

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

A currency portfolio's variability depends on the standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.

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

Netting can achieve all but one of the following:

An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive.

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.

The most useful measure of an MNC's liquidity is its:

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

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

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:

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?

Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is $0.205. If the spot rate of the rand at maturity of the investment is $0.203, what is the effective yield of investing in rand?

Assume the U.S. one-year interest rate is 15%, while the South African one-year interest rate is 13%. If the South African rand ____ by ____%, a U.S.-based MNC is indifferent between investing in dollars and investing in rand.

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:

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

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.

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

A currency portfolio's variability depends on the standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.

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

Netting can achieve all but one of the following:

An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive.

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.

The most useful measure of an MNC's liquidity is its:

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

Assume the U.S. one-year interest rate is 15%, while the South African one-year interest rate is 13%. If the South African rand by %, a U.S.-based MNC is indifferent between investing in dollars and investing in rand.