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Exam 21: International Cash Management

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Question 1

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Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate of 10%. 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%.
B) 8.92%.
C) 10.00%.
D) none of the above

E) A) and B)
F) A) and C)

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Question 2

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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 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.

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

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Question 3

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

Assume that a U.S. firm considers investing in British one-year Treasury securities. The interest rate on these securities is 12%, while the interest rate on the same securities in the U.S. is 10%. 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:

Preauthorized payment is an arrangement that allows a corporation to charge a customer's bank account up to some limit.

A currency portfolio's variability depends on the standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.

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

Netting can achieve all but one of the following:

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.

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 expected effective yield of the portfolio Sciorra is contemplating (assume the two currencies move independently from one another) ?

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.

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:

An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive.

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

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 expected effective yield of the portfolio contemplated by Moore Corporation?

Assume Costner 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%. 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.

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.

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.

Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal interest rate of 10%. At the time the investment is made, the spot rate of the rand is $0.205. If the spot rate of the rand at maturity of the investment is $0.203, what is the effective yield of investing in rand?

Leading refers to the payment of supplies earlier than necessary; lagging refers to the payment of supplies later than allowed.