International Financial Management, 8e (Eun)

Chapter 19 Multinational Cash Management

1) 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.

Answer: FALSE
Topic: The Management of International Cash Balances
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2) 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.

Answer: TRUE
Explanation: Given IRP and hedging opportunities this is true. Likely a contentious question.
Topic: Blocked Funds
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3) A netting center necessarily implies that the MNC has a central cash manager.

Answer: FALSE
Topic: Blocked Funds
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4) A multilateral netting system is beneficial in reducing the number of and the expense associated
with inter-affiliate foreign exchange transactions.

Answer: TRUE
Topic: Blocked Funds
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5) A central cash manager has a global view of the most favorable borrowing rates and most
advantageous investment rates.

Answer: TRUE
Topic: Blocked Funds
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6) A centralized cash pool assists in reducing the problem of mislocated funds and in funds
mobilization.

Answer: TRUE
Topic: Blocked Funds
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7) A centralized cash management system with a cash pool can reduce the investment the MNC
has in precautionary cash balances, saving the firm money.

Answer: TRUE
Topic: Blocked Funds
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8) 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

Answer: D
Topic: The Management of International Cash Balances
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9) 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

Answer: B
Topic: The Management of International Cash Balances
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10) Precautionary cash balances

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

Answer: A
Topic: The Management of International Cash Balances
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11) 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

Answer: B
Topic: The Management of International Cash Balances
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12) 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

Answer: B
Topic: The Management of International Cash Balances
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13) Good cash management boils down to

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

Answer: A
Topic: The Management of International Cash Balances
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4) 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 inter-affiliate 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

Disbursements by:
Singapore Hong Kong U.S.
Receipts by:
Singapore 64 88
Hong Kong
U.S. 6

Calculate, in Singapore dollars, the amount that the inter-affiliate 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

Answer: B
Explanation: (S$16,000 + S$22,000 + S$80,000 + S$110,000 + S$50,000 + S$44,000) −
(S$70,000 + S$82,000) = S$322,000 − S$152,000 = S$170,000
Topic: CASE APPLICATION: Teltrex's Cash Management System

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5) 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 inter-affiliate 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

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

Answer: B
Explanation: S$170,000 (from problem above) × 0.0045 = S$765.
Topic: CASE APPLICATION: Teltrex's Cash Management System

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16) Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions
shown at left. Use bilateral netting to reduce the number of foreign exchange transactions by half.

A)

B)

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C)

D) none of the options

Answer: A
Topic: Bilateral Netting of Internal and External Net Cash Flows

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17) Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions
shown at left. Use multilateral netting to reduce the number of foreign exchange transactions.

A)

B)

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C)

D) none of the options

Answer: D
Topic: Bilateral Netting of Internal and External Net Cash Flows

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18) Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions
shown at left. Use multilateral netting with a central depository to reduce the number of foreign
exchange transactions.

A)

B)

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C)

D) none of the options

Answer: B
Topic: Bilateral Netting of Internal and External Net Cash Flows

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19) 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 inter-affiliate 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

Which of the following is an accurate chart of their current situation?

A)

B)

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C)

D)

Answer: A
Topic: Bilateral Netting of Internal and External Net Cash Flows

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20) Find the net exposure of the U.S. MNC with the following intra-affiliate transactions shown.

A) $55
B) $65
C) $800
D) none of the options

Answer: A
Topic: Bilateral Netting of Internal and External Net Cash Flows

21) 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 in
C) ₤20 out
D) none of the options

Answer: B
Topic: Bilateral Netting of Internal and External Net Cash Flows

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22) 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

Answer: E
Topic: Bilateral Netting of Internal and External Net Cash Flows
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23) 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

Answer: D
Topic: Bilateral Netting of Internal and External Net Cash Flows
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24) With a centralized cash depository

A) an 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

Answer: D
Topic: Bilateral Netting of Internal and External Net Cash Flows
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25) 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.

Answer: A
Topic: Cash Management Systems in Practice
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26) 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 intra company float, which is frequently as high as five days, even for wire
transfers.
D) all of the options

Answer: D
Topic: Cash Management Systems in Practice
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27) 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.

Answer: D
Topic: Cash Management Systems in Practice
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28) 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

Answer: D
Topic: Cash Management Systems in Practice
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29) Which of the following statements about multilateral netting system are correct?

(i) Each affiliate nets all its inter-affiliate receipts against all its disbursements.
(ii) Each affiliate transfers or receives a balance, depending on whether it is a net payer or receiver.
(iii) The net funds to be received by the affiliates will equal the net disbursements to be made by
the affiliates.
(iv) Only two foreign exchange transactions are necessary since the affiliates' net receipts will
always be equal to zero.
(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)

Answer: B
Topic: Cash Management Systems in Practice
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30) Assuming that the inter-affiliate 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
A) $34,960.33
B) $139,841.33
C) $104,880.88
D) none of the options

Answer: C
Explanation: ($40,0002 + $60,0002 + $30,0002 + $70,0002)0.5 = $104,880.88
Topic: Cash Management Systems in Practice

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31) Assuming that the inter-affiliate 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

Answer: B
Explanation: 3 × ($40,0002 + $60,0002 + $30,0002 + $70,0002)0.5 = $314,642.65
Topic: Cash Management Systems in Practice

32) 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
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

Answer: A
Topic: Cash Management Systems in Practice
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33) For a recent month, the following payments matrix of inter-affiliate cash flows was forecasted:

Disbursement From:
Receipts by: France Britain U.S.
France € 500 € 800
Britain £ 300 £ 400
U.S. $ 1,000 $ 500

Use multilateral netting to find the net payment from the British affiliate to the U.S. affiliate.

The spot exchange rates are $1.20 = €1.00 and $1.80 = £1.00; affiliates get paid in home currency.
A) $60
B) $20
C) $0
D) none of the options

Answer: A
Topic: Cash Management Systems in Practice

34) The U.S. IRS allows transfer prices to be set using comparable uncontrolled price method.
This method requires
A) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B) the price at which the good is resold by the distribution affiliate is reduced by an amount
sufficient to cover overhead costs and a reasonable profit.
C) an appropriate profit is added to the cost of the manufacturing affiliate.
D) financial models and econometric techniques.

Answer: A
Topic: Cash Management Systems in Practice
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35) The U.S. IRS allows transfer prices to be set using the resale price method
A) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B) the price at which the good is resold by the distribution affiliate is reduced by an amount
sufficient to cover overhead costs and a reasonable profit.
C) an appropriate profit is added to the cost of the manufacturing affiliate.
D) financial models and econometric techniques.

Answer: B
Topic: Cash Management Systems in Practice
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36) The U.S. IRS allows transfer prices to be set using the cost plus approach
A) finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B) the price at which the good is resold by the distribution affiliate is reduced by an amount
sufficient to cover overhead costs and a reasonable profit.
C) an appropriate profit is added to the cost of the manufacturing affiliate.
D) financial models and econometric techniques.

Answer: C
Topic: Cash Management Systems in Practice
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37) For a recent month, the following payments matrix of inter-affiliate cash flows was forecasted:

Disbursement From:
Receipts by: France Britain U.S.
France € 500 € 800
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)

B)

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C)

D) none of the options

Answer: C
Topic: Cash Management Systems in Practice

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38) For a recent month, the following payments matrix of inter-affiliate 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)

B)

C)

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D) none of the options

Answer: D
Topic: Cash Management Systems in Practice

39) Simplify the following set of intra company 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.

Answer: C

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Topic: Cash Management Systems in Practice

40) Simplify the following set of intra-company cash flows for this Swiss 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.

Answer: B
Topic: Cash Management Systems in Practice

41) 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

Answer: A
Topic: Cash Management Systems in Practice
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42) Under multilateral netting
A) each affiliate nets all its inter-affiliate 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 inter-affiliate payments are made or even computed, since no real cash flows are involved.
D) all of the options

Answer: A
Topic: Cash Management Systems in Practice
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43) One benefit of a centralized cash depository is

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

Answer: A
Topic: Cash Management Systems in Practice
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44) 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

Answer: A
Explanation: Solve the proportion for X to convert euros to dollars: €2,000 / X = €1 / $1.50,
where X = $3,000. If A owes B $1,000, and B owes A $3,000 (from conversion), then $2,000 is
paid from B to A (calculated as $3,000 − $1,000).
Topic: Cash Management Systems in Practice

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45) For the U.S. affiliate shown below, net all its inter-affiliate receipts against all its
disbursements.
Use the following exchange rates.

£ 1.00 = $ 2.00
€ 1.00 = $ 1.50
SFr 1.00 = $ 0.80

The net inter-affiliate cash flow for the U.S. affiliate is

A) $0.
B) −$135.
C) $135.
D) $405.

Answer: A
Topic: Cash Management Systems in Practice

46) The U.S. IRS allows transfer prices to be set using comparable uncontrolled price method.
This method is difficult to apply in practice because many factors enter into the pricing of goods
and services. Examples include
A) differences in the terms of sale.
B) differences in quantity and or quality sold.
C) differences in location or date of sale.
D) all of the options

Answer: D
Topic: Cash Management Systems in Practice
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47) Ad valorem duties are best described as
A) a percentage tax levied at customs on the assessed value of the imported good.
B) a value-added tax on domestic production.
C) a percentage tax levied at customs on the value added by shipping the good.
D) none of the options

Answer: A
Topic: Cash Management Systems in Practice
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48) According to a recent survey by Ernst and Young, the most important tax issue that
multinational enterprises now face is
A) transfer pricing.
B) choice of accounting method to use in preparing consolidated income statements when firms
have subsidiaries in countries with different tax treatments of expense items.
C) choice of accounting method to use in preparing consolidated income statements when firms
have subsidiaries in countries with different tax treatments of income recognition.
D) none of the options

Answer: A
Topic: Cash Management Systems in Practice
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49) Which of the following statements about transfer pricing is true?

A) The higher the transfer price, the larger the gross profits of the transferring division relative to
the receiving division.
B) Very high markup policy used in the transfer pricing to a subsidiary makes the adjusted present
value (APV) of that subsidiary's capital expenditure appear less attractive.
C) Very low markup policy used in the transfer pricing to a subsidiary makes the adjusted present
value (APV) of that subsidiary's capital expenditure appear less attractive.
D) The higher the transfer price, the larger the gross profits of the transferring division relative to
the receiving division. In addition, very high markup policy used in the transfer pricing to a
subsidiary makes the adjusted present value (APV) of that subsidiary's capital expenditure appear
less attractive.

Answer: D
Topic: Cash Management Systems in Practice
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50) The lower the transfer price

A) the higher the net profit reported by the MNC.
B) the lower the gross profit of the transferring division relative to the receiving division.
C) the higher the gross profit of the receiving division relative to the transferring division.
D) none of the options

Answer: B
Topic: Cash Management Systems in Practice
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Accessibility: Keyboard Navigation

51) 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

Answer: B
Topic: Cash Management Systems in Practice
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52) In reference to establishing "transfer prices" between the affiliates of an MNC, which of the
following relates to the "resale" price approach?
A) Comparable uncontrolled price between unrelated firms.
B) The price at which the good is resold by the distribution affiliate is reduced by an amount to
cover overhead costs and a reasonable profit.
C) Assumes that the manufacturing cost is readily available.
D) Is based on financial and economic models and econometric techniques.

Answer: B
Topic: Cash Management Systems in Practice
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53) "Unbundling fund transfers" from an MNC and to its affiliates refers to the following activity:
A) instead of lumping all costs into a single transfer price, for the MNC (parent firm) to recognize
the cost of the physical good and each service separately that it provides to its affiliates.
B) in addition to charging for the cost of the physical good, for the parent firm to charge for
technical training of the affiliates' staff, cost of worldwide advertising, royalty, licensing fee, and
technology, whenever applicable, to facilitate for the MNC to present and support to the taxing
authority of a host country that each charge is legitimate and can be well substantiated.
C) used for removing blocked funds from a host country that is enforcing foreign exchange
restrictions.
D) all of the options

Answer: D
Topic: Cash Management Systems in Practice
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54) Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates for X and Y,
respectively, are 20 percent and 30 percent. The transfer price per unit is currently set at $1,000,
but it can go as high as $1,250.

Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is
used.
A) $250,000
B) $500,000
C) $1,000,000
D) $1,250,000

Answer: A
Explanation: $10,000 × ($1,000 − $1,250) × (0.20 − 0.30) = $250,000
Topic: Cash Management Systems in Practice

55) Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates for X and Y,
respectively, are 20 percent and 30 percent. The transfer price per unit is currently set at $1,000,
but it can go as high as $1,250.

Assume that Y pays a tax deductible tariff of 7 percent on imported merchandise. Calculate the
increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.
A) $50,000
B) $100,000
C) $125,000
D) $250,000

Answer: C
Explanation: First, calculate the effective marginal tax rate for Y: (1 + 0.07) × (0.30 − 0.07) =
24.64%, which rounds to 25%. Next, solve the following: $10,000 × ($1,250 − $1,000) × (0.20 −
0.25) = − $125,000
Topic: Cash Management Systems in Practice

56) Which term correctly describes the following situation? When a country imposes exchange
restrictions on its own currency, limiting conversion to other currencies, an MNC's frustrated
remittance of profits from a subsidiary would be
A) blocked funds.
B) stopped funds.
C) constipated funds.
D) money down the toilet.

Answer: A
Topic: Blocked Funds
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57) On blocked funds strategy is
A) transferring personnel from corporate headquarters to the subsidiary offices.
B) using the national airlines of the host country when possible for the international travel of all
MNC executives.
C) holding business conferences of the MNC in the host country, where all expenses are paid by
the local subsidiary.
D) all of the options

Answer: D
Topic: Blocked Funds
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58) Reasons for a country to impose exchange restrictions on its own currency, limiting conversion
to other currencies include
A) enticing more foreign investment from MNCs.
B) for a variety of reasons, the country may find itself short of foreign currency reserves.
C) creating a home-grown business climate.
D) all of the options

Answer: B
Topic: Blocked Funds
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59) Why can blocked funds be detrimental to all concerned?

A) Host countries want to attract foreign industries that benefit their economic development;
blocked funds make MNCs less willing to invest.
B) MNCs should not be expected to make beneficial investment where they may not be able to
receive an appropriate return.
C) Local competitors may be able to reap monopoly profits.
D) Host countries want to attract foreign industries that benefit their economic development;
blocked funds make MNCs less willing to invest. Additionally, MNCs should not be expected to
make beneficial investment where they may not be able to receive an appropriate return.

Answer: D
Topic: Blocked Funds
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60) When engaged in bilateral netting
A) total inter-affiliate receipts will always equal total inter-affiliate disbursements.
B) we can reduce the number of foreign exchange transactions among an MNC with N affiliates to
or less.

C) each affiliate nets all its inter-affiliate 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

Answer: D
Topic: Blocked Funds

61) Which one of the following is a false statement when engaged in bilateral netting?
A) Total inter-affiliate receipts will always equal total inter-affiliate disbursements.
B) We can reduce the number of foreign exchange transactions among an MNC with N affiliates to
or less.

C) Each affiliate nets all its inter-affiliate 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

Answer: B
Topic: Blocked Funds

62) Which one of the following is a false statement when engaged in bilateral netting?
A) Total inter-affiliate receipts will always equal total inter-affiliate disbursements.
B) We can reduce the number of foreign exchange transactions among an MNC with N affiliates to
or less.

C) Each affiliate nets all its inter-affiliate 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

Answer: C
Topic: Blocked Funds

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Copyright © 2018 McGraw-Hill
63) Which one of the following is a false statement when engaged in bilateral netting?
A) Total inter-affiliate receipts need not always equal total inter-affiliate disbursements.
B) We can reduce the number of foreign exchange transactions among an MNC with N affiliates to
or less.

C) Each affiliate nets all its inter-affiliate 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

Answer: A
Topic: Blocked Funds

64) Bilateral netting can reduce the number of foreign exchange transactions among an MNC with
N affiliates to
A)

B)

C)

D) none of the options

Answer: C
Topic: Blocked Funds

65) 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

Answer: B
Topic: Blocked Funds
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Copyright © 2018 McGraw-Hill
66) 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

Answer: D
Topic: Blocked Funds
Accessibility: Keyboard Navigation

67) The formula for the standard deviation of cash held by the centralized depository for N
affiliates is

A) The formula assumes that inter-affiliate cash flows have a correlation coefficient of −1.
B) The formula assumes that inter-affiliate cash flows have a correlation coefficient of +1.
C) The formula assumes that inter-affiliate cash flows have a correlation coefficient of 0.
D) none of the options

Answer: C
Topic: Blocked Funds

68) Some countries allow inter-affiliate 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 inter-affiliate receipts against all its disbursements. It then transfers or
receives the balance, respectively, if it is a net payer or receiver.

Answer: A
Topic: Blocked Funds
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Copyright © 2018 McGraw-Hill
69) 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.

Answer: B
Topic: Blocked Funds
Accessibility: Keyboard Navigation

70) Your firm's inter-affiliate 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 U.S. affiliate.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out

Answer: A
Explanation: $125,000 − $70,000 = $55,000
Topic: Blocked Funds

35
Copyright © 2018 McGraw-Hill
71) Your firm's inter-affiliate 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.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out

Answer: B
Explanation: $70,000 − $85,000 = $15,000
Topic: Blocked Funds

72) Your firm's inter-affiliate 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

Answer: C
Explanation: $65,000 − $65,000 = $0
Topic: Blocked Funds

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Copyright © 2018 McGraw-Hill
73) Your firm's inter-affiliate 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 U.K. affiliate.
A) $55,000 in
B) $15,000 out
C) $0 in or out
D) $40,000 out

Answer: D
Explanation: $90,000 − $130,000 = −$40,000
Topic: Blocked Funds

74) Your firm's inter-affiliate 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

Answer: A
Explanation: $40,000 − $35,000 = $5,000
Topic: Blocked Funds

37
Copyright © 2018 McGraw-Hill
75) Your firm's inter-affiliate 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

Answer: B
Explanation: $30,000 − $45,000 = −$5,000
Topic: Blocked Funds

76) Your firm's inter-affiliate 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 German affiliate.
A) $5,000 in
B) $5,000 out
C) $30,000 out
D) $30,000 in

Answer: C
Explanation: $15,000 − $45,000 = −$30,000
Topic: Blocked Funds

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Copyright © 2018 McGraw-Hill
77) Your firm's inter-affiliate 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

Answer: D
Explanation: $60,000 − $30,000 = $30,000
Topic: Blocked Funds

78) Your firm's inter-affiliate 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.S. affiliate.
A) $0 in or out
B) $5,000 out
C) $10,000 in
D) $15,000 out

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash flow in
(and out) of $0.
Topic: Blocked Funds

39
Copyright © 2018 McGraw-Hill
79) Your firm's inter-affiliate 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

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash flow in
(and out) of $0.
Topic: Blocked Funds

80) Your firm's inter-affiliate 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

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash flow in
(and out) of $0.
Topic: Blocked Funds

40
Copyright © 2018 McGraw-Hill
79) Your firm's inter-affiliate 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

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash
flow in(and out) of $0.
Topic: Blocked Funds

82) Your firm's inter-affiliate 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

Answer: A
Explanation: In this case, receipts are equivalent to disbursements, resulting in a net cash
flow in(and out) of $0.
Topic: Blocked Funds

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