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Finance Presentation Lesson
Finance Presentation Lesson
1.The traditional argument for maintaining small cash balances proposes that
____
B) The interest that is lost on cash balances is more than offset by the convenience of having cash readily
available
C) Cash balances should be held in multiple banks to offset the risk of any one bank failing
D) The amount of a firm’s cash balance is inversely related to the firm’s sales volume
According to Keynes’s finance motive, the quantity of money demanded for transaction and precautionary motive (cash
balance) is not very sensitive to interest rate.
Therefore, not much interest is lost and having cash readily available is convenient for the firm and they can worry less
about the interest loss.
C) Cash balances should be held in multiple banks to offset the risk of any one bank failing
• Not necessarily, On the contrary, there are several drawbacks of putting cash balances in multiple banks. The abilities
of banks to facilitate cash transfers for the MNC vary among countries. Mostly, say for example, an MNC with
subsidiaries in eight countries would have to deal with eight different banking systems. It will reduce the
effectiveness of cash management.
D) The amount of a firm’s cash balance is inversely related to the firm’s sales volume
• It is possible to keep a sustainable sales growth without affecting a firm’s cash balance.
2. Canada Treasury securities have the lowest ____ and securities with ____ have less risk
of price fluctuation due to changes n interest rates.
____
characteristics:
• Since they are short term, interest rate fluctuations have almost no effect on them like
other fixed income securities.
INTERNATIONAL CASH MANAGEMENT
3) What is the primary benefit that a firm can achieve by using multiple-currency
financing?
____
• It helps the MNC to primarily diversify its assets and reduce the risk of investing in only one currency.
For example, if an MNC suspects that US dollar will drop in future, it can buy one or more currencies
that will rise
Option A, B and D are also benefits but they are secondary benefits in nature.
INTERNATIONAL CASH MANAGEMENT
4. Commercial paper (CP) is only issued by firms with very high credit ratings because
____
A) The Securities and Exchange Commission only allows firms with very high credit ratings to issue commercial paper
B) Only firms with very high credit ratings can list commercial paper on the capital markets
C) Commercial paper is unsecured and investors are only willing to buy commercial paper that is backed by firms with very
D) Commercial paper is very expensive to issue and only firms with very high credit ratings can afford to issue it
ANSWER: C) Commercial paper is unsecured and investors are only willing to buy
commercial paper that is backed by firms with very high credit ratings
Reasons for choosing option C
Characteristics of Commercial paper: It is not entirely necessary for a firm to have the
highest credit ratings to issue commercial paper, however, the main reason why only firms
with high credit ratings usually issue commercial paper has got to do something with the
firm’s credibility and not defaulting on its commercial papers. Since commercial paper is
unsecured, and market savvy investors are very well aware of this, an investor would only
trust and put his money in a firm that had a high credit rating compared to the other firms,
even if the other firm(s) were well-known. Thus, it is important of the firm to maintain
high credit rating to attract potential investors to invest in its commercial papers. So,
option C) is the most relevant answer.
INTERNATIONAL CASH MANAGEMENT
5. The international Fisher effect (IFE) suggests that if a firm borrows in a lower interest
foreign currency:
____
A) The choice of currency will have a significant effect on the cost of the loan because the interest rate is relatively low
B) The choice of currency will not matter in the cost of the loan because the foreign currency will appreciate during the
term of the loan
C) The choice of currency will have an effect on the cost of the loan because the foreign currency will depreciate during
the term of the loan
D) The choice of currency may or may not affect the cost of the loan, depending on how interest rates change during the
term of the loan
ANSWER: B) The choice of currency will not matter in the cost of the loan because the foreign currency
will appreciate during the term of the loan
Reasons for choosing option B
Rationale: B) is the right answer. As we know, the formula for effective (exchange rate adjusted) return on a
foreign bank deposit (regardless of the currency) is:
Now, we can see, r= ih, plugging this in the equation above we can find,
Ih= (1+if)(1+ef)-1
Solving for ef, we find the following equation:
ef=
Which basically implies the following, if foreign currency interest is lower, or, if<ih, ef will be
positive, so, foreign currency will appreciate, and vice versa. So, option A) and C) and D) is
incorrect.
INTERNATIONAL CASH MANAGEMENT
6. Which of the following is not likely to be a good investment for temporarily idle cash?
____
A) Commercial paper
B) Government bonds due shortly
C) Certificates of deposit
D) Recently issued high-grade corporate bonds
However, MNCs also need some Ready cash to tackle some unforeseen operating needs of the firm, but exactly
when and in what amount would be difficult to predict. Ready cash needs to be liquidated on a very short notice.
Idle cash can be a good source of ready cash, but without investment, idle cash represents loss of potential
revenue.
To effectively handle this problem, MNCs prefer to invest their temporarily idle cash into securities that are safe
and short term and has the ability to quickly convert into cash.
So, option A, B and C are the preferred choice for investing temporary idle cash.
Although safe, Recently issued high grade corporate bonds are a longer term debt instrument, with maturity of at
least one year or more. Therefore, they are more suited for long term investments, and thus not likely a good
choice for investing temporarily idle cash.