Question 1

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

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

A ____ allows customers to send payments to a post office box number.

Accepted Answer

A)  bilateral netting system 
B)  multilateral netting system 
C)  lockbox 
D)  preauthorized payment

Question 4

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.

Question 5

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.

Question 6

According to the text:

Accepted Answer

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

Question 7

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%.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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:

Accepted Answer

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 10

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.

Question 11

To ____, MNCs can use preauthorized payments.

Accepted Answer

A)  accelerate cash inflows 
B)  minimize currency conversion costs 
C)  manage blocked funds 
D)  manage intersubsidiary cash transfers

Question 12

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.

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.

Question 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Exam 21: International Cash Management

Assume that you forecast the value of the euro as follows for the next year: If the interest rate on the euro is 12%, the expected effective yield from a euro-denominated deposit is:

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

A ____ allows customers to send payments to a post office box number.

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

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

According to the text:

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:

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

Which of the following statements is false?

To ____, MNCs can use preauthorized payments.

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:

The international Fisher effect suggests that:

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.

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

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

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

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.

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