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Exam 19: International Cash Management

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Question 21

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

A) True
B) False

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Question 22

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If a foreign currency consistently depreciated against the pound over several periods and had lower interest rates at the beginning of those periods than the UK interest rates, then:

A) UK firms could have achieved a higher effective yield on foreign deposits than on UK deposits during those periods.
B) the international Fisher effect is supported by the results.
C) A and B
D) none of the above.

E) A) and D)
F) B) and D)

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Question 23

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

Assume that a UK firm considers investing in US one-year Treasury securities. The interest rate on these securities is 12 per cent, while the interest rate on the same securities in the UK is 10 per cent. The firm believes that today's spot rate is an appropriate forecast for the spot rate of the dollar in one year. Based on this information, the effective yield on US securities from the British firm's perspective is:

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?

Assume that interest rate parity holds. The UK one-year interest rate is 10 per cent and the Australian one-year interest rate is 8 per cent. What will the approximate effective yield be for an Australian citizen of a one-year deposit denominated in pounds? Assume the deposit is covered by a forward sale of dollars.

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

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

The international Fisher effect suggests that:

Assume Costner plc, a UK-based MNC, invests 2,500,000 Zambian kwacha (ZMK) for a one-year period at a nominal interest rate of 9 per cent. At the time the loan is extended, the spot rate of the kwacha is £0.00033. If the spot rate of the kwacha in one year is £0.00030, the pound amount initially invested in Zambia is £____, and £____ are paid out after one year.

Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the US interest rate. If non-US firms invested in US Treasury securities during this period, their effective yield would have been:

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 per cent ringgit and 60 per cent leu. Moore has identified the following information: Mean effective financing rate of Malaysian ringgit for three months 3 per cent Mean effective financing rate of Romanian leu for three months 2 per cent Standard deviation of Malaysian ringgit's effective financing rate 0.15 Standard deviation of Romanian leu's effective financing rate 0.07 Correlation coefficient of effective financing rates of these two currencies 0.19 What is the standard deviation of the portfolio contemplated by Moore Corporation?

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

Assume the UK one-year interest rate is 11 per cent and the French one-year interest rate is 18 per cent. The break-even level of depreciation in the euro at which the UK and French investments would exhibit the same return to a UK investor is:

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.