Q&A Hero

Q: Which of the following is used to manage a firm's cash disbursements? A) lockbox system B) bankers' acceptances C) repurchase agreements D) zero balance accounts

Q: The benefits of a lockbox system include all of the following EXCEPT A) increased working cash. B) elimination of clerical functions. C) increase in total float. D) early knowledge of dishonored checks.

Q: A lockbox system can reduce all of the following elements of float EXCEPT A) mail float. B) processing float. C) transit float. D) disbursing float.

Q: Cash management system objectives include A) maintaining sufficient cash to meet disbursal needs. B) maintaining idle cash balances at "doomsday event" levels. C) maintaining accounts payable balances at zero by early bill payment. D) All of the above are objectives of the system.

Q: What is the greatest risk associated with cash management? A) yields B) insolvency C) holding too much cash D) managing float

Q: When a corporation designs an investment strategy for investing temporary excess cash balances in marketable securities, it must consider a variety of factors. Which of the following is the most important? A) maintaining the safety of principal B) maintaining the greatest float C) achieving the highest yield D) illiquidity

Q: When a corporation designs an investment strategy for investing temporary excess cash balances in marketable securities, it must consider a variety of factors. Which of the following is the least important? A) liquidity B) financial risk C) achieving the highest yield D) maintaining the safety of principal

Q: Which of the following is NOT a motive for a corporation to hold cash balances? A) transactions B) float C) precautionary D) speculative

Q: A company is technically insolvent when A) cash outflows in a given period are greater than cash inflows. B) earnings before interest payments are less than the interest payments. C) it lacks the necessary liquidity to promptly pay its current debt obligations. D) current ratio is less than 1.0.

Q: All of the following elements of a cash management program will likely contribute to an increase in the value of the firm EXCEPT A) collect cash more quickly. B) slow down cash disbursements. C) prepare more accurate cash flow forecasts. D) increase cash balances for precautionary reasons.

Q: Which of the following would be an example of the "speculative motive" for a firm holding cash balances? A) make dividend payments B) anticipating a strike C) purchase of inventory D) take advantage of an anticipated decline in the price of raw materials

Q: Which of the following would be an example of the "precautionary motive" for a firm holding cash balances? A) purchase of inventory B) anticipating a strike C) purchase fixed assets D) make dividend payments

Q: Which of the following would be an example of the "transactions motive" for a firm holding cash balances? A) investing "excess cash balances" B) anticipating a downturn in the economy C) purchase of inventory D) take advantage of an anticipated decline in the price of raw materials

Q: A company that has an unpredictable cash flow, and is holding cash because of things that might happen due to this uncertainty, is holding a larger minimum cash balance due to which type of motive? A) transaction B) precautionary C) speculative D) common sense

Q: Which of the following affects the precautionary motive for holding cash? A) the cash flow predictability B) the firm's access to external funds C) both A and B D) none of the above

Q: A construction firm that accumulates cash in anticipation of a significant drop in lumber costs is an example of the ________ motive for holding cash. A) transaction B) speculative C) hedging D) precautionary

Q: John Maynard Keynes segmented a firm's demand for cash into the following motives: A) risk, investment, and liquidity. B) transaction, speculative and precautionary. C) transaction, liquidity, and speculative. D) transaction, speculative, and risky.

Q: Cash inflows come from A) purchase of marketable securities. B) purchase of fixed assets. C) credit sales. D) cash sales.

Q: The speed of the collections process is determined by three types of float: mail float, processing float, and transit float.

Q: U.S. Treasury bills, bankers' acceptances and commercial paper are all sold on a discount basis.

Q: Commercial paper is much more liquid than money-market mutual funds because commercial paper is available to only the most creditworthy corporations.

Q: U.S. Treasury bills are extremely liquid due to excellent secondary markets.

Q: Money-market mutual funds are diversified portfolios of short-term, high-grade debt instruments.

Q: U.S. Treasury bills are exempt from federal, state, and local income taxes.

Q: A company concerned about the liquidity of its near-cash securities should invest in U.S. Treasury bills because the secondary market for U.S. Treasury bills is excellent.

Q: Available yields on financial securities depend on their financial risk, interest rate risk, liquidity, and taxability.

Q: Marketable securities are only those security investments the firm can convert into cash balances within one year.

Q: An extremely liquid asset is one that can be sold for cash quickly without a reduction in price below its current market value.

Q: A security is considered liquid if it can be sold, regardless of the time it takes to make the sale.

Q: A Treasury bill is a near-cash asset.

Q: Marketable securities are near-cash assets because they can be converted into cash quickly.

Q: The minimum denomination of U.S. Treasury bills is $100,000.

Q: The interest earned on U.S. Treasury bills is subject to state and local income taxes.

Q: Yields on various financial instruments tend to be positively correlated with maturity.

Q: One of the attractive features of commercial paper is an active secondary market.

Q: What is exchange rate risk? Why would a multinational firm be concerned about it?

Q: Define the types of risk that are commonly referred to as political risk, and give some examples of them.

Q: What is direct foreign investment? What are the additional risks that a multinational corporation must consider before undertaking direct investment in a foreign country?

Q: All of the following are examples of political risk for a U.S. company investing in a foreign country EXCEPT A) expropriation of plant and equipment. B) the problem of blocked funds. C) substantial changes in foreign country tax laws. D) government requirements that ownership must be limited to U.S. citizens.

Q: An important (additional) consideration for a direct foreign investment is A) political risk. B) maximizing the firm's profits. C) attaining a high international P/E ratio. D) maintaining the domestic cost of capital.

Q: Strategies to counter exchange rate risk include all of the following EXCEPT A) futures contracts. B) spot-market hedges. C) forward-market hedges. D) money-market hedges.

Q: In addition to those risks faced by domestic corporations, multinational corporations face A) political risk. B) exchange risk. C) Both A and B are correct. D) All domestic and multinational corporations face similar risk profiles.

Q: Suppose a U.S. importer purchases an Italian product today but will not pay for it for 90 days. The cost of the product today is 35,000 euros. The spot exchange rate today is .6233 euros per dollar. The importer creates a forward-market hedge. The 90-day forward rate is .6100 euros per dollar. The amount the U.S. importer will pay in 90 days is A) $56,153. B) $57,377. C) $55,683. D) $56,667.

Q: Suppose a U.S. importer purchases an Italian product today but will not pay for it for 90 days. The cost of the product today is 30,000 euros. The spot exchange rate today is .6233 euros per dollar. If the U.S. importer does not hedge the position, which of the following spot exchange rates in 90 days will yield the highest returns? A) 0.6833 euros per dollar B) 0.6499 euros per dollar C) $1.4844 per euro D) $1.5387 per euro

Q: Suppose a U.S. importer purchases an Italian product today but will not pay for it for 90 days. The cost of the product today is 85,000 euros. The spot exchange rate today is .7559 euros per dollar. How much is the cost today in dollars? A) $58,062 B) $56,153 C) $65,683 D) $64,252

Q: Exchange rate risk A) exists when the contract is written in terms of the foreign currency. B) exists also in direct foreign investments and foreign portfolio investments. C) does not exist if the international trade contract is written in terms of the domestic currency. D) all of the above

Q: Exchange rate risk A) arises from the fact that the spot exchange rate on a future date is a random variable. B) applies only to certain types of international businesses. C) has been phased out due to recent international legislation. D) has been reduced by the adoption of floating exchange rates.

Q: A U.S.-based multinational corporation has 100% owned subsidiary in Argentina. The subsidiary operates only domestically, that is, all transactions occur within Argentina. Therefore, the U.S. multinational corporation A) is exposed to translation risk only. B) is not exposed to exchange rate risk because the subsidiary operates 100% domestically. C) is exposed to both translation exposure and economic exposure. D) is most concerned with transactions exposure.

Q: A U.S.-based multinational corporation (MNC) currently has an investment portfolio that includes Japanese securities valued at 10,000,000 yen. The company also owes its Japanese suppliers 12,000,000 yen. Which of the following statements is MOST correct? A) The MNC is not exposed to exchange rate risk because it holds both assets and liabilities denominated in yen. B) The MNC will be exposed to exchange rate losses if the yen declines in value relative to the dollar. C) The MNC will be exposed to exchange rate losses if the yen increases in value relative to the dollar. D) The MNC can avoid exchange rate risk by paying its Japanese liabilities with dollars.

Q: Exchange rate risk is highest for companies with A) international trade contracts denominated in the foreign currency. B) investment portfolios that contain foreign securities. C) direct foreign investments in foreign subsidiaries. D) international trade contracts denominated in the domestic currency.

Q: An American manufacturer with its corporate headquarters in New York City is purchasing goods from a French supplier. Which of the following statements is true regarding the exchange rate risk for this contract? A) The American company will bear all of the exchange rate risk if the contract is denominated in dollars. B) The French company will bear all of the exchange rate risk if the contract is denominated in dollars. C) Both companies could bear exchange rate risk if the contract is denominated in British pounds. D) Both B and C are correct.

Q: Only purely domestic firms that buy all of their inputs and sell all of their outputs in their home countries are unaffected by events in international financial markets.

Q: Exchange rate fluctuations do not increase the riskiness of foreign portfolio investments because changes in exchange rates are compensated for by changes in interest rates and investment returns.

Q: In an international trade contract involving one buyer and one seller, both parties may be exposed to exchange rate risk if the contract is denominated in a third currency.

Q: With international investing, unlike domestic investing, exchange rate risk could cause a marginally-positive-NPV project to be rejected due to the additional risk.

Q: Exchange rate risk exists in International Trade Contracts, Foreign Portfolio Investments, and in Direct Foreign Investments.

Q: Exchange-rate risk arises from the fact that the spot exchange rate on a future date is unknown today.

Q: Exchange rate risk exists for a party to a contract if the contract is denominated in a foreign currency.

Q: Exchange rate risk is the risk that exchange rates will be lower in the future than they are today.

Q: Which of the following parity conditions is (are) correct? A) The interest-rate parity theory states that the forward premium/discount should be equal and opposite in size to the national interest rate differential. B) The purchasing-power parity theory states that in the long run exchange rate changes tend to reflect international differences in inflation rates. C) The international Fisher effect states that national interest rate differentials are the result of inflation differentials. D) All of the above are correct.

Q: Exchange rate changes tend to reflect international differences in inflation rates. What is the name of this theory? A) the purchasing power parity theory B) the IMF effect C) interest rate parity theory D) the law of one price

Q: A corporate investment manager needs to invest $1,000,000 for the next 6 months. The current nominal rate of interest in the United States is 5%, while the nominal rate of interest in Argentina is 8%. Which of the following statements is MOST correct? A) The manager should invest the funds in Argentina and make an extra $30,000 for the year. B) The manager may decide to invest the funds in the United States due to the international Fisher effect, which suggests inflation in Argentina may make the extra interest income worth less in one year. C) The manager is indifferent between investing the funds in the United States or Argentina because real returns will always be the same in the end. D) The manager cannot invest in Argentina because his company is investing dollars.

Q: The law of one price suggests that all of the following will have the same price in different countries EXCEPT A) oil. B) grain. C) fresh vegetables. D) silver.

Q: A bottle of German wine costs €21 (euros) in Berlin. According to the purchasing power parity theory, what would the bottle sell for in New York if it costs the New York company $1.25 per bottle to transport the wine to the United States? Assume the exchange rate is $1.32 per euro. A) $40.54 B) $28.97 C) $27.22 D) $39.50

Q: Suppose the current spot rate in New York is .0119 dollars per yen. Inflation for the coming year in the United States is expected to be 3%, while inflation for the coming year is Japan is expected to be only 1%. Using the purchasing power parity theory, what is the expected spot rate at the end of the year should be A) .0110147 dollars per yen. B) .0108159 dollars per yen. C) .0138373 dollars per yen. D) .0121356 dollars per yen.

Q: Exceptions to purchase power parity exist if arbitrage opportunities are limited by characteristics such as perishability or high transportation costs.

Q: Argentina experienced a period of extremely high inflation relative to its trading partners and Argentina's currency decreased in value. This is an example of purchasing power parity theory.

Q: Purchasing power parity suggests that interest rates in different countries will adjust so that each currency will have the same purchasing power.

Q: What does the law of one price say?

Q: The spot exchange rate in New York is 1.600 dollars per British pound. The 360-day forward exchange rate is 1.680 dollars per pound. The one-year interest rate in Great Britain is 2% while the one-year interest rate in the United States is 4%. a. If the interest rate in Great Britain remains at 2%, what should the interest rate be in the United States according to the interest rate parity theory? b. An American investor with $40,000 decides to take advantage of the differences in rates. Ignoring transaction costs, how can the American investor exploit the disequilibrium? Compare the amount of money the investor will have at the end of the year if he or she invests in one-year U.S. securities versus one-year British securities.

Q: Except for the effects of small transaction costs, the forward premium or discount should be equal and opposite in size to the difference in the national interest rates for securities of the same maturity. What is the name of this theory? A) the purchasing power parity theory B) the Bobby Fisher effect C) interest rate parity theory D) the law of one price

Q: One theory that is useful states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity. This theory is known as A) the forward rate theory. B) the interest rate parity theory. C) the exchange rate theory. D) the covered interest arbitrage theory.

Q: Money-market hedges and forward-market hedges rely on the A) interest rate parity theory. B) purchasing power parity theory. C) law of large numbers. D) capital asset pricing model.

Q: Suppose the 360-day forward exchange rate is 1.657 dollars per British pound, and the current spot rate is 1.625 dollars per British pound. If the 360-day interest rate in the United States is 5% and the 360-day interest rate in Great Britain is 3%, is the market in equilibrium according to the interest rate parity theory? A) Yes, because the forward premium on the pound (2%) is exactly offset by the lower interest rate in Great Britain. B) No, because the higher interest rate in the United States (2%) implies that the forward exchange rate should be 2% lower than the current spot rate. C) No, because the forward premium on the pound is 2% while the interest rate in the United States is 67% higher than the interest rate in Great Britain. D) Cannot be determined without knowing the amount of money being exchanged.

Q: Interest Rate Parity theory states that interest rates must be the same in all countries using floating exchange rates or else international markets will not be in equilibrium.

Q: Interest rate parity theory states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity.

Q: Describe exchange rate risk in direct foreign investment.

Q: What is a forward exchange rate?

Q: Who is an arbitrageur? How does an arbitrageur make money?

Q: What is a spot transaction? What is a direct quote? An indirect quote?