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Indicate whether the statement is true or false.
1. Preauthorized payment is an arrangement that allows a corporation to charge a customer’s bank account up to some
limit.
a.
True
b.
False
2. 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.
a.
True
b.
False
3. Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of
cross-border transactions between subsidiaries.
a.
True
b.
False
4. Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates may be
preferable to a single point estimate.
a.
True
b.
False
5. Centralized cash management is more complicated when the MNC uses multiple currencies.
a.
True
b.
False
6. If interest rate parity holds and the forward rate is expected to be an unbiased forecast of the future spot rate, then an
uncovered investment in a foreign deposit will on average earn a similar effective yield as an investment in a domestic
deposit.
a.
True
b.
False
7. An MNC that uses a strategy of dynamic hedging will apply a hedge when it expects a foreign currency that it holds to
appreciate, and it will remove the hedge when it expects the currency to depreciate.
a.
True
b.
False
8. Generally, if interest rate parity holds and the forward rate is an unbiased predictor of the future spot rate, then the
international Fisher effect will also hold.
a.
True
b.
False
9. A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are
international rather than domestic.
a.
True
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b.
False
10. Leading refers to paying for supplies earlier than necessary; lagging refers to delaying the payment for supplies.
a.
True
b.
False
11. An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic
yield is 2 percent. If the Singapore dollar appreciates by less than 2 percent, the investment in Singapore will be more
attractive.
a.
True
b.
False
12. In what is known as dynamic hedging, banks always hedge open positions in any foreign currencies.
a.
True
b.
False
13. When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly
positively correlated.
a.
True
b.
False
14. Since each subsidiary may be more concerned with its own operations than with the overall operations of the MNC, a
centralized management group may need to monitor the parent-subsidiary and intersubsidiary cash flows.
a.
True
b.
False
15. The use of lockboxes is a way of accelerating cash inflows.
a.
True
b.
False
16. In a bilateral netting system, transactions between the parent and a subsidiary or between two subsidiaries are
consolidated over a specific period of time.
a.
True
b.
False
17. In general, exchange rate fluctuations cause cash flows to be more volatile and uncertain.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
18. The international Fisher effect suggests that:
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
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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.
19. The effective yield of investing in a foreign currency depends on both the ____ and the ____ of the foreign currency.
a.
inflation rate; exchange rate movements
b.
income level; interest rates
c.
interest rate; exchange rate movements
d.
interest rate; amount invested
20. The Swiss one-year interest rate is 7 percent, while the U.S. one-year interest rate is 2 percent. Assume that interest
rate parity exists. If a U.S. firm invests in a Swiss one-year deposit and sells Swiss francs forward with a forward contract
to hedge its exchange rate exposure, the effective yield from investing in a one-year deposit in Switzerland will be about:
a.
9 percent.
b.
7 percent.
c.
4 percent.
d.
2 percent.
21. 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:
a.
14.45 percent.
b.
–4.45 percent.
c.
14.00 percent.
d.
–4.00 percent.
22. A common purpose of intersubsidiary leading or lagging strategies is to:
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.
23. 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.
a.
interest rate parity (IRP)
b.
the international Fisher effect (IFE)
c.
purchasing power parity (PPP)
d.
None of these are correct.
24. Assume that a U.S. firm considers investing in British one-year Treasury securities. The interest rate on these
securities is 12 percent, while the U.S. interest rate on the same securities is 10 percent. 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:
a.
equal to the U.S. interest rate.
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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.
25. A ____ allows customers to send payments to a post office box.
a.
bilateral netting system
b.
multilateral netting system
c.
lockbox
d.
preauthorized payment
26. Assume Scarlett 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 percent. 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.
a.
1,500; 1,526
b.
1,526; 1,500
c.
1,500; 1,400
d.
1,400; 1,500
27. Matis Corporation invests 1,500,000 South African rand at a nominal interest rate of 10 percent. 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?
a.
11.08 percent
b.
8.92 percent
c.
10.00 percent
d.
None of these are correct.
28. To ____, MNCs can use preauthorized payments.
a.
accelerate cash inflows
b.
minimize currency conversion costs
c.
manage blocked funds
d.
manage intersubsidiary cash transfers
29. 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.
a.
premium; home
b.
discount; home
c.
premium; foreign
d.
discount; home AND premium; foreign
30. If interest rate parity exists, and the forward rate is an accurate forecast of the future spot rate:
a.
an uncovered investment in a foreign deposit is not worthwhile.
b.
an investment in a foreign deposit will earn a higher effective yield than an investment in a domestic deposit.
c.
an investment in a foreign deposit will be worthwhile if the foreign inflation rate exceeds the domestic
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inflation rate.
d.
None of these are correct.
31. Which of the following is not a technique to optimize cash flows?
a.
Accelerate cash inflows.
b.
Minimize currency conversion costs.
c.
Manage blocked funds.
d.
All of these are techniques to optimize cash flows.
32. Which of the following is true?
a.
Some countries may prohibit netting.
b.
Some countries may prohibit forms of leading and lagging.
c.
Some countries may prohibit netting AND some countries may prohibit forms of leading and lagging.
d.
None of these are correct.
33. 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:
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.
34. 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:
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.
U.S. firms could have achieved a higher effective yield on foreign deposits than on U.S. deposits during those
periods AND the international Fisher effect is supported by the results.
d.
None of these are correct.
35. Which of the following is not typically considered by MNCs when investing cash over a short-term period?
a.
large deposits at commercial banks
b.
Treasury bills
c.
commercial paper
d.
foreign stocks
36. The most useful measure of an MNC’s liquidity is its:
a.
cash balance.
b.
amount of securities held as investments.
c.
political risk rating.
d.
potential access to funds.
37. Assume that interest rate parity holds. The U.S. one-year interest rate is 10 percent, and the Australian one-year
interest rate is 8 percent. What will the approximate effective yield of a one-year deposit denominated in U.S. dollars be
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for an Australian citizen? (Assume the deposit is covered by a forward sale of dollars.)
a.
10 percent
b.
8 percent
c.
2 percent
d.
This question cannot be answered without more information.
38. Which of the following cannot be achieved by netting?
a.
reduction of cross-border transactions
b.
reduction of transaction costs
c.
reduction of currency conversion costs
d.
elimination of transaction exposure
39. According to the international Fisher effect:
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.
40. The Thai one-year interest rate is 10 percent, while the U.S. one-year interest rate is 4 percent. Assume that interest
rate parity exists. If a U.S.-based MNC uses the forward rate to forecast the exchange rate of the Thai baht in one year, the
expected effective yield from investing in a one-year deposit in Thailand is:
a.
14 percent.
b.
10 percent.
c.
4 percent.
d.
6 percent.
41. 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:
a.
0 percent.
b.
5 percent.
c.
8 percent.
d.
13 percent.
42. Assume that you forecast the value of the euro as follows for the next year:
Percentage Change
Probability of Occurrence
–2%
30%
3%
40%
5%
30%
If the interest rate on the euro is 12 percent, the expected effective yield from a euro-denominated deposit is:
a.
15.36 percent.
b.
15.70 percent.
c.
12.00 percent.
d.
14.35 percent.
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e.
None of these are correct.
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:
Currency
Percentage Change
Probability
Trinidad dollar
–1.0%
35%
Trinidad dollar
2.0%
65%
Japanese yen
–2.0%
45%
Japanese yen
1.0%
55%
43. Refer to Exhibit 21-1 above. What is the expected effective yield of the portfolio Sciorra is contemplating (assume the
two currencies move independently from one another)?
a.
6.47 percent
b.
8.84 percent
c.
8.50 percent
d.
None of these are correct.
44. 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:
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 these are correct.
45. 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. firm 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:
a.
12 percent.
b.
9 percent.
c.
3 percent.
d.
6 percent.
46. Which of the following statements is false?
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.
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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:
Currency
Percentage Change
Probability
Trinidad dollar
–1.0%
35%
Trinidad dollar
2.0%
65%
Japanese yen
–2.0%
45%
Japanese yen
1.0%
55%
47. Refer to Exhibit 21-1 above. What is the probability that the yield of the two-currency portfolio is less than the
domestic yield?
a.
.1575
b.
.35
c.
.6425
d.
1
e.
None of these are correct.
48. 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:
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.
49. Which of the following is a strategy than an MNC might use when the host country where a subsidiary is located
imposes restrictions blocking the transfer of funds from the country?
a.
Instruct the subsidiary to set up a research and development division to use funds within the host country.
b.
Use transfer pricing in a manner that will increase the expenses incurred by the subsidiary.
c.
Instruct the subsidiary to obtain financing from a local bank in the host country.
d.
All of these are strategies that an MNC might use when the host country where a subsidiary is located imposes
restrictions blocking the transfer of funds from the country.
50. Assume that Subsidiaries X and Y of the same MNC often trade with each other. Assume that Subsidiary X has excess
cash while Subsidiary Y is short on cash. How can Subsidiary X help Subsidiary Y?
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.
X should lag its payments sent to Y to pay for imports from Y AND X should request that Y lead its payments
to be sent for goods that Y sent to X.
d.
None of these are correct.
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