Question 1

A common purpose of inter-subsidiary 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 2

The Mexican one-year interest rate is 27 percent, while the U.S. one-year interest rate is 9 percent. If a U.S. firm creates a one-year 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.

Accepted Answer

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

Question 3

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 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 4

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

Question 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

MNCs often use ____ to invest excess cash while retaining liquidity.

Accepted Answer

A)  international bond markets 
B)  international equity markets 
C)  international money markets 
D)  the market for acquisitions 
A)  international bond markets 
B)  international equity markets 
C)  international money markets 
D)  the market for acquisitions

Question 8

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:

Accepted Answer

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. 
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 9

Assume the U.S. one-year interest rate is 11% and the French one-year interest rate is 18%. The break-even 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:

Accepted Answer

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

Question 10

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 11

Assume that you forecast the value of the euro as follows for the next year:
$\begin{array}{cccc}
\underline  {\text {  Percentage Change} }&\underline{   \text { Probability of Occurrence }} \
 \text {-2\%  } &30\%\
 \text { 3\% } &40\%\
 \text { 5\% } &30\%\
\end{array}$
 
If the interest rate on the euro is 12%, the expected effective yield from a euro-denominated deposit is:

Accepted Answer

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

Question 12

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 13

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 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 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 14

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 15

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 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 standard deviation of the portfolio contemplated by Moore Corporation?

Accepted Answer

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

Question 17

Which of the following is not a technique to optimize cash flows?

Accepted Answer

A)  Accelerate cash inflows 
B)  Minimize currency conversion costs 
C)  Manage blocked funds 
D)  All of the above are techniques 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 18

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 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?

Accepted Answer

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 
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

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

Accepted Answer

A) True 
 B)False

A common purpose of inter-subsidiary leading or lagging strategies is to:

The Mexican one-year interest rate is 27 percent, while the U.S. one-year interest rate is 9 percent. If a U.S. firm creates a one-year 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.

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

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

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

MNCs often use ____ to invest excess cash while retaining liquidity.

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:

Assume the U.S. one-year interest rate is 11% and the French one-year interest rate is 18%. The break-even 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:

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.

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

According to the international Fisher effect:

The international Fisher effect suggests that:

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

Which of the following statements is false?

Which of the following is not a technique to optimize cash flows?

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

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?

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

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

A common purpose of inter-subsidiary leading or lagging strategies is to:

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

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

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

MNCs often use ____ to invest excess cash while retaining liquidity.

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:

Assume the U.S. one-year interest rate is 11% and the French one-year interest rate is 18%. The break-even 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:

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.

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

According to the international Fisher effect:

The international Fisher effect suggests that:

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

Which of the following statements is false?

Which of the following is not a technique to optimize cash flows?

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

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?

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

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

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

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.