Version 1 1
Student name:__________
1) Efficient cash management techniques can
A) reduce the investment in cash balances and foreign exchange transaction expenses.
B) provide for maximum return from the investment of excess cash.
C) result in borrowing at lowest rate when a temporary cash shortage exists.
D) all of the options
2) The foundation of any cash management system is its
A) cash flow.
B) cash budget.
C) transactional balances.
D) precautionary cash balances.
3) Cash management refers to
A) the decision to grant credit to customers or to remain “cash and carry.”
B) the investment the firm has in transaction balances and precautionary balances.
C) a domestic firm’s investment in foreign currency.
D) none of the options
4) Precautionary cash balances
Version 1 2
A) are necessary in case the firm has underestimated the amount of cash needed to cover
transactions.
B) are necessary to cover scheduled outflows of funds during a cash budgeting period.
C) are necessary in case the firm has underestimated the amount of cash needed to cover
transactions, and are also necessary to cover scheduled outflows of funds during a cash
budgeting period.
D) none of the options
5) Precautionary cash balances
A) represent an increasingly-important source of interest income for many MNCs.
B) are necessary in case the firm has underestimated the amount needed to cover
transactions.
C) are synonymous with speculative cash balances.
D) none of the options
6) Multinational cash management
A) is really no different for an MNC than for a purely domestic firm in a closed
economy.
B) concerns itself with the size of cash balances, their currency denominations, and
where these cash balances are located among the MNC’s affiliates.
C) concerns itself with the size of cash balances and their currency denominations, but
not where these cash balances are located among the MNC’s affiliates, since intra-affiliate default
risk is not an issue.
D) none of the options
7) Good cash management encompasses
Version 1 3
A) investing excess funds at the most favorable interest rate and borrowing at the lowest
rate when there is a temporary cash shortage.
B) investing excess funds at the lowest rate and borrowing at the highest rate when there
is a temporary cash shortage.
C) hedging currency exposure with judicious use of futures, forwards, and currency
option contracts.
D) none of the options
8) ABC Trading Company of Singapore purchases spices in bulk from around the world,
packages them into consumer size quantities and sells them through sales affiliates in Hong
Kong and the Unites States. For a recent month, the following payments matrix of interaffiliate
cash flows, stated in Singapore dollars, was forecasted.
ABC Trading Company Payments Matrix (S$000)
Disbursements by:
Singapore
Hong Kong
U.S.
Receipts by:
Singapore
80
110
Hong Kong
16
44
U.S.
22
50
Calculate, in Singapore dollars, the amount that the interaffiliate foreign exchange transaction
will be reduced by with multilateral netting.
A) S$152,000
B) S$170,000
C) S$322,000
D) S$405,000
9) Under a bilateral netting system
Version 1 4
A) each pair of affiliates determines the net amount due between them, and only the net
amount is transferred.
B) each affiliate nets all its interaffiliate receipts against all its disbursements
C) both of the options
D) neither of the options
10) ABC Trading Company of Singapore purchases spices in bulk from around the world,
packages them into consumer size quantities and sells them through sales affiliates in Hong
Kong and the Unites States. For a recent month, the following payments matrix of interaffiliate
cash flows, stated in Singapore dollars, was forecasted.
ABC Trading Company Payments Matrix (S$000)
Singapore
Hong Kong
U.S.
Receipts by:
Singapore
80
110
Hong Kong
16
44
U.S.
22
50
If foreign exchange transactions cost ABC 0.45 percent, what savings results from netting?
A) S$684
B) S$765
C) S$1,449
D) S$1,823
Version 1 5
11) Consider a U.S. MNC with three subsidiaries and the following foreign exchange
transactions shown. Use bilateral netting to reduce the number of foreign exchange transactions
by half.
A) [MISSING IMAGE: , ]
B) [MISSING IMAGE: , ]
C) [MISSING IMAGE: , ]
D) none of the options
12) Consider a U.S. MNC with three subsidiaries and the following foreign exchange
transactions shown. Use multilateral netting to reduce the number of foreign exchange
transactions.
Version 1 6
A) [MISSING IMAGE: , ]
B) [MISSING IMAGE: , ]
C) [MISSING IMAGE: , ]
D) none of the options
13) Consider a U.S. MNC with three subsidiaries and the following foreign exchange
transactions shown. Use multilateral netting with a central depository to reduce the number of
foreign exchange transactions.
A) [MISSING IMAGE: , ]
B) [MISSING IMAGE: , ]
C) [MISSING IMAGE: , ]
D) none of the options
14) ABC Trading Company of Singapore purchases spices in bulk from around the world,
packages them into consumer size quantities and sells them through sales affiliates in Hong
Kong and the Unites States. For a recent month, the following payments matrix of interaffiliate
cash flows, stated in Singapore dollars, was forecasted.
ABC Trading Company Payments Matrix (S$000)
Disbursements by:
Version 1 7
Singapore
Hong Kong
U.S.
Receipts by:
Singapore
80
110
Hong Kong
16
44
U.S.
22
50
Which of the following is an accurate chart of their current situation?
A) [MISSING IMAGE: , ]
B) [MISSING IMAGE: , ]
C) [MISSING IMAGE: , ]
D) [MISSING IMAGE: , ]
15) Find the net exposure of the U.S. MNC with the following intra-affiliate transactions
shown.
Version 1 8
A) $55
B) $65
C) $800
D) none of the options
16) Find the net exposure of the British subsidiary of the U.S. MNC with the following intra
affiliate transactions shown.
A) $40 out
B) $65 out
C) ₤20 out
D) none of the options
17) Benefits of a multilateral netting system include
A) the decrease in the expense associated with funds transfer, which in some cases can
be over $1,000 for a large international transfer of foreign exchange.
B) the reduction in the number of foreign exchange transactions and the associated cost
of making fewer but larger transactions.
C) the reduction in intra-company float, which is frequently as high as five days even
for wire transfers.
D) the benefits that accrue from the establishment of a formal information system,
which serves as the foundation for centrally managing transaction exposure and the investment
of excess funds.
E) all of the options
Version 1 9
18) With a centralized cash depository
A) there is less chance for an MNC’s funds to be denominated in the wrong currency.
B) the central cash manager has a global view of the MNC’s overall cash position.
C) there is less chance of mislocated funds.
D) all of the options
19) With a centralized cash depository
A) a MNC can facilitate fund mobilization.
B) system-wide excess cash is invested at the most advantageous rates.
C) system-wide cash shortages are borrowed at the most advantageous rates.
D) all of the options
20) Not all countries allow MNCs the freedom to net payments,
A) by limiting netting, more needless foreign exchange transactions flow through the
local banking system.
B) MNCs can avoid these restrictions by using a Centralized Cash Depository.
C) MNCs can avoid these restrictions by using wire transfers.
D) MNCs can avoid these restrictions by using a Centralized Cash Depository, as well
as by using wire transfers.
21) Which of the following is not a frequently cited benefit of a multilateral netting system?
Version 1 10
A) The reduction in the number of foreign exchange transactions and the associated cost
of making fewer but larger transactions.
B) The reduction in intracompany float, which is frequently as high as five days even
for wire transfers.
C) The savings in administrative time.
D) none of the options.
22) With regard to cash management systems in practice, studies suggest that the benefits of
a multilateral netting system include
A) the decrease in the expense associated with funds transfer, which in some cases can
be over $1,000 for a large international transfer of foreign exchange.
B) the savings in administrative time.
C) the reduction in intracompany float, which is frequently as high as five days, even for
wire transfers.
D) all of the options
23) Several international banks offer multilateral netting software packages. These packages
A) calculate the net currency positions of each affiliate.
B) can integrate the netting function with foreign exchange exposure management.
C) only work on the Mac platform.
D) calculate the net currency positions of each affiliate and can integrate the netting
function with foreign exchange exposure management.
24) MNCs can reduce their exchange rate expense
A) by using bilateral netting.
B) by using a centralized cash management system.
C) by using multilateral netting.
D) all of the options
Version 1 11
25) Which of the following statements about multilateral netting system are correct?
1. (i) Each affiliate nets all its interaffiliate receipts against all its disbursements.
2. (ii) Each affiliate transfers or receives a balance, depending on whether it is a net payer or
receiver.
3. (iii) The net funds to be received by the affiliates will equal the net disbursements to be
made by the affiliates.
4. (iv) Only two foreign exchange transactions are necessary since the affiliates’ net receipts
will always be equal to zero.
5. (v) Only two foreign exchange transactions are necessary since the affiliates’ net
disbursements will always be equal to zero.
A) (i) and (ii)
B) (i), (ii), and (iii)
C) (i), (ii), (iii), and (iv)
D) (i), (ii), (iii), and (v)
26) Assuming that the interaffiliate cash flows are uncorrelated with one another, calculate
the standard deviation of the portfolio of cash held by the centralized depository for the
following affiliate members:
Expected
Standard
Affiliate
Transactions
Deviation
U.S.
$
100,000
$
40,000
Canada
$
150,000
$
60,000
Mexico
$
175,000
$
30,000
Chile
$
200,000
$
70,000
Version 1 12
A) $34,960.33
B) $139,841.33
C) $104,880.88
D) none of the options
27) Assuming that the interaffiliate cash flows are uncorrelated with one another, calculate
the minimum cash balance to have if the firm follows a conservative policy of having three
standard deviations of cash for precautionary purposes.
Expected
Standard
Affiliate
Transactions
Deviation
U.S.
$
100,000
$
40,000
Canada
$
150,000
$
60,000
Mexico
$
175,000
$
30,000
Chile
$
200,000
$
70,000
A) $34,960.33
B) $314,642.65
C) $104,880.88
D) none of the options
28) If French-based Affiliate A owes U.S.-based affiliate B $1,000 and Affiliate B owes
Affiliate A €2,000 when the exchange rate is $1.10 = €1.00. The net payment between A and B
should be
Version 1 13
A) €1,091 from B to A.
B) €1,091 from A to B.
C) $1,200 from B to A.
D) none of the options
29) For a recent month, the following payments matrix of interaffiliate cash flows was
forecasted:
Disbursement From:
Receipts by:
France
Britain
U.S.
France
€
500
€
800
Britain
£
300
£
400
U.S.
$
1,000
$
500
Use bilateral netting to find the net payment from the U.S. affiliate to the British affiliate.
The spot exchange rates are $1.20 = €1.00 and $1.80 = £1.00; affiliates get paid in home
currency.
A) $220
B) $40
C) $60
D) none of the options
30) For a recent month, the following payments matrix of interaffiliate cash flows was
forecasted:
Disbursement From:
Receipts by:
France
Britain
U.S.
France
€
500
€
800
Version 1 14
Britain
£
300
£
400
U.S.
$
1,000
$
500
The spot exchange rates are $1.20 = €1.00 and $1.80 = £1.00; affiliates get paid in home
currency. Use multilateral netting to find the net payments to and from all parties.
Which of the following is an accurate chart of their current situation?
A) [MISSING IMAGE: , ]
B) [MISSING IMAGE: , ]
C) [MISSING IMAGE: , ]
D) none of the options
31) For a recent month, the following payments matrix of interaffiliate cash flows was
forecasted:
Disbursement From:
Receipts by:
France
Britain
U.S.
France
€
500
€
800
Britain
£
480
£
300
U.S.
$
600
$
960
The spot exchange rates are $1.20 = €1.00 and $2.00 = £1.00; affiliates get paid in home
currency. Use multilateral netting to find the net payments to and from all parties.
Which of the following is an accurate chart of their current situation?
A) [MISSING IMAGE: , ]
B) [MISSING IMAGE: , ]
C) [MISSING IMAGE: , ]
D) none of the options
Version 1 15
32) Simplify the following set of intracompany cash flows for this U.S. firm.
Use the following exchange rates:
£
1.00
=
$
2.00
€
1.00
=
$
1.50
SFr
1.00
=
$
0.80
The fewest number of intra-affiliate cash flows is
A) zero.
B) one.
C) two.
D) three.
33) Simplify the following set of intra-company cash flows for this Swiss firm.
Use the following exchange rates:
Version 1 16
£
1.00
=
$
2.00
€
1.00
=
$
1.50
SFr
1.00
=
$
0.80
The fewest number of intra-affiliate cash flows is
{MISSING IMAGE}
A) zero.
B) one.
C) two.
D) three.
34) Which will reduce the number of foreign exchange transactions the most for an MNC?
A) Multilateral netting
B) Bilateral netting
C) Fish netting
D) none of the options
35) Under multilateral netting
A) each affiliate nets all its interaffiliate receipts against all its disbursements. It then
transfers or receives the balance, respectively, if it is the net payer or receiver.
B) each pair of affiliates determines the net amount due between them, and only the net
amount is transferred.
C) no interaffiliate payments are made or even computed, since no real cash flows are
involved.
D) all of the options
36) One benefit of a centralized cash depository is
Version 1 17
A) the MNC’s investment in precautionary cash balances can be substantially reduced
without a reduction in its ability to cover unforeseen expenses.
B) each affiliate will have greater autonomy in managing its own cash balances.
C) exchange rate restrictions can be easily circumvented.
D) none of the options
37) If French-based Affiliate A owes U.S.-based affiliate B $1,000 and Affiliate B owes
Affiliate A €2,000 when the exchange rate is $1.50 = €1.00. The net payment between A and B
should be closest to
A) $2,000 from B to A.
B) €2,000 from A to B.
C) $1,000 from B to A.
D) none of the options
38) For the U.S. affiliate shown below, net all its interaffiliate receipts against all its
disbursements.
Use the following exchange rates.
£
1.00
=
$
2.00
€
1.00
=
$
1.50
SFr
1.00
=
$
0.80
Version 1 18
The net interaffiliate cash flow for the U.S. affiliate is
A) $0.
B) −$135.
C) $135.
D) $405.
39) When engaged in multilateral netting
A) total interaffiliate receipts will always equal total interaffiliate disbursements.
B) we can reduce the number of foreign exchange transactions among an MNC with N
affiliates to (N − 1) or less.
C) each affiliate nets all its interaffiliate receipts against all its disbursements. It then
transfers or receives the balance, respectively, if it is a net payer or receiver.
D) all of the options
40) Which one of the following is a false statement when engaged in bilateral netting?
Version 1 19
A) Total interaffiliate receipts will always equal total interaffiliate disbursements.
B) We can reduce the number of foreign exchange transactions among an MNC with N
affiliates to or less.</p>
C) Each affiliate nets all its interaffiliate receipts against all its disbursements. It then
transfers or receives the balance, respectively, if it is a net payer or receiver.
D) all of the options
41) Which one of the following is a false statement when engaged in bilateral netting?
A) Total interaffiliate receipts will always equal total interaffiliate disbursements.
B) We can reduce the number of foreign exchange transactions among an MNC with N
affiliates to or less.</p>
C) Each affiliate nets all its interaffiliate receipts against all its disbursements. It then
transfers or receives the balance, respectively, if it is a net receiver or payer respectively.
D) all of the options
42) Which one of the following is a false statement when engaged in bilateral netting?
A) Total interaffiliate receipts need not always equal total interaffiliate disbursements.
B) We can reduce the number of foreign exchange transactions among an MNC with N
affiliates to or less.</p>
C) Each affiliate nets all its interaffiliate receipts against all its disbursements. It then
transfers or receives the balance, respectively, if it is a net payer or receiver.
D) all of the options
43) Bilateral netting can reduce the number of foreign exchange transactions among an MNC
with N affiliates to
Version 1 20
A)
B)
C)
D) none of the options
44) Mislocated funds are defined as
A) funds being found in the wrong account.
B) funds being denominated in the wrong currency.
C) funds being invested with the wrong maturity.
D) none of the options
45) A firm keeps a precautionary cash balance to cover unexpected transactions during the
budget period. The size of this balance depends on how safe the firm desires to be in its ability to
meet unexpected transactions.
A) The larger the precautionary cash balance, the greater is the firm’s ability to meet
unexpected expenses.
B) The larger the precautionary cash balance, the less is the risk of financial
embarrassment and loss of credit standing.
C) The larger the precautionary cash balance, the greater the potential opportunity cost.
D) all of the options
46) The formula for the standard deviation of cash held by the centralized depository for N
affiliates is
Version 1 21
A) The formula assumes that interaffiliate cash flows have a correlation coefficient of
−1.
B) The formula assumes that interaffiliate cash flows have a correlation coefficient of
+1.
C) The formula assumes that interaffiliate cash flows have a correlation coefficient of 0.
D) none of the options
47) Some countries allow interaffiliate transactions to be settled only on a gross basis. That
is,
A) all receipts for a settlement period must be grouped into a single large receipt and all
disbursements must be grouped into a single large payment.
B) all receipts and disbursements for a settlement period must be handled individually.
C) all receipts and disbursements for a settlement period must be netted against each
other and then a single large payment is made.
D) each affiliate nets all its interaffiliate receipts against all its disbursements. It then
transfers or receives the balance, respectively, if it is a net payer or receiver.
48) Not all countries allow MNCs the freedom to net payments,
A) the U.S., Canada, and Great Britain allow only netting between each other.
B) some countries require the MNC to ask permission, and some countries limit netting.
C) but that is fine, since netting typically has costs that outweigh the benefits for an
MNC.
D) All of the options may be correct.
49) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
Total
Receipts
Version 1 22
U.S.
30
35
60
125
Canada
20
10
40
70
Germany
10
25
30
65
U.K.
40
30
20
90
Total Disbursements
70
85
65
130
Find the net cash flow in (out of) the U.S. affiliate.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out
50) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
Total
Receipts
U.S.
30
35
60
125
Canada
20
10
40
70
Germany
10
25
30
65
U.K.
40
30
20
90
Total Disbursements
70
85
65
130
Find the net cash flow in (out of) the Canadian affiliate.
Version 1 23
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out
51) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
Total
Receipts
U.S.
30
35
60
125
Canada
20
10
40
70
Germany
10
25
30
65
U.K.
40
30
20
90
Total Disbursements
70
85
65
130
Find the net cash flow in (out of) the German affiliate.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out
52) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
Total
Receipts
U.S.
30
35
60
125
Version 1 24
Canada
20
10
40
70
Germany
10
25
30
65
U.K.
40
30
20
90
Total Disbursements
70
85
65
130
Find the net cash flow in (out of) the U.K. affiliate.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out
53) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
Total
Receipts
U.S.
10
15
15
40
Canada
10
10
10
30
Germany
5
5
5
15
U.K.
20
20
20
60
Total Disbursements
35
35
45
30
Find the net cash flow in (out of) the U.S. affiliate.
A) $5,000 in
B) $5,000 out
C) $30,000 in
D) $30,000 out
Version 1 25
54) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
Total
Receipts
U.S.
10
15
15
40
Canada
10
10
10
30
Germany
5
5
5
15
U.K.
20
20
20
60
Total Disbursements
35
35
45
30
Find the net cash flow in (out of) the Canadian affiliate.
A) $5,000 in
B) $5,000 out
C) $30,000 in
D) $30,000 out
55) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
Total
Receipts
U.S.
10
15
15
40
Canada
10
10
10
30
Germany
5
5
5
15
U.K.
20
20
20
60
Total Disbursements
35
35
45
30
Version 1 26
Find the net cash flow in (out of) the German affiliate.
A) $5,000 in
B) $5,000 out
C) $30,000 out
D) $30,000 in
56) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
Total
Receipts
U.S.
10
15
15
40
Canada
10
10
10
30
Germany
5
5
5
15
U.K.
20
20
20
60
Total Disbursements
35
35
45
30
Find the net cash flow in (out of) the U.K. affiliate.
A) $5,000 in
B) $5,000 out
C) $30,000 out
D) $30,000 in
57) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
Version 1 27
U.S.
10
5
15
Canada
10
5
20
Germany
5
5
5
U.K.
15
20
5
Find the net cash flow in (out of) the U.S. affiliate.
A) $0 in or out
B) $5,000 out
C) $10,000 in
D) $15,000 out
58) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
U.S.
10
5
15
Canada
10
5
20
Germany
5
5
5
U.K.
15
20
5
Find the net cash flow in (out of) the Canadian affiliate.
A) $0 in or out
B) $20,000 out
C) $15,000 in
D) $30,000 out
Version 1 28
59) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
U.S.
10
5
15
Canada
10
5
20
Germany
5
5
5
U.K.
15
20
5
Find the net cash flow in (out of) the German affiliate.
A) $0 in or out
B) $5,000 out
C) $30,000 in
D) $30,000 out
60) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
U.S.
10
5
15
Canada
10
5
20
Germany
5
5
5
U.K.
15
20
5
Find the net cash flow in (out of) the U.K. affiliate.
A) $0 in or out
B) $5,000 out
C) $30,000 in
D) $30,000 out
Version 1 29
61) Your firm’s interaffiliate cash receipts and disbursements matrix is shown here ($000):
Disbursements
Receipts
U.S.
Canada
Germany
U.K.
U.S.
10
5
15
Canada
10
5
20
Germany
5
5
5
U.K.
15
20
5
Find the net cash flow for the entire firm
A) $0 in or out
B) $5,000 out
C) $30,000 in
D) $30,000 out
62) Many of the skills necessary for effective cash management are the same regardless of
whether the firm has only domestic operations or if it operates internationally.
⊚ true
⊚ false
63) The cash manager of a domestic firm should source funds internationally to obtain the
lowest borrowing cost and to place excess funds wherever the greatest return can be earned
regardless of currency.
⊚ true
⊚ false
64) A netting center necessarily implies that the MNC has a central cash manager.
Version 1 30
⊚ true
⊚ false
65) A multilateral netting system is beneficial in reducing the number of and the expense
associated with interaffiliate foreign exchange transactions.
⊚ true
⊚ false
66) A central cash manager has a global view of the most favorable borrowing rates and most
advantageous investment rates.
⊚ true
⊚ false
67) A centralized cash pool assists in reducing the problem of mislocated funds and in funds
mobilization.
⊚ true
⊚ false
68) A centralized cash management system with a cash pool can reduce the investment the
MNC has in precautionary cash balances, saving the firm money.
⊚ true
⊚ false
69) Precautionary cash balances are necessary in case a firm has overestimated the amount
needed to cover transactions.
⊚ true
⊚ false
Version 1 31
70) With a centralized cash depository, excess cash is remitted to the central cash pool.
⊚ true
⊚ false
71) Multilateral netting is an efficient and cost-effective mechanism for handling interaffiliate
foreign exchange transactions.
⊚ true
⊚ false
Version 1 32
Answer Key
Test name: chapter 19
Version 1 33
Version 1 34