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Draft, letter of credit, short term assets and liabilities

1. Consider a bank that acknowledges that it will make payments on behalf of a beer importer after the beer is delivered to the importer. This reflects:
A) accounts receivable financing.
B) Forfeiting
C) Factoring
D) a letter of credit

2. Which of the following payment terms provides the supplier with the greatest degree of protection?
A) letters of credit.
B) Consignment
C) prepayment.
D) drafts (sight/time).

3. The ____________________ is a private corporation owned by a consortium of commercial banks and industrial companies, but the ______________ is a self-sustaining government agency. (Points: 3)
A) Overseas Private Investment Corporation (OPIC); Private Export Funding Corporation (PEFCO)
B) Private Export Funding Corporation (PEFCO); Overseas Private Investment Corporation (OPIC)
C) Private Export Funding Corporation (PEFCO); Ex-Imbank
D) Overseas Private Investment Corporation (OPIC); Ex-Imbank

4. A(n) ___________ is an unconditional promise drawn by one party, instructing the buyer to pay the face amount upon presentation
A) Draft
B) bill of lading
C) trade acceptance
D) letter of credit

5. The Working Capital Guarantee Program and the Medium-term Guarantee Program are offered by the:
A) Export-Import Bank of the United States
B) Private Export Funding Corporation
C) Overseas Private Investment Corporation
D) none of the above

6. The international Fisher effect suggests that
A) the effective yield on shortterm foreign securities should, on average, equal the yield on shortterm domestic securities
B) the effective yield on shortterm securities of high inflation countries is greater than the yield on shortterm domestic securities.
C) if domestic income grows faster than foreign income, the effective yield on shortterm foreign securities is higher than shortterm domestic securities.
D) if foreign tax rates equal domestic tax rates, the exchange rates of different currencies will change by the same degree.

7. 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
A) 10%.
B) 8%
C) 2%
D) cannot answer without more information

8. Assume that you forecast the value of the euro as follows for the next year:
Percentage ChangeProbability of Occurrence
-2% 30%
3% 40%
5% 30%

If the interest rate on the euro is 12%, the expected effective yield from a euro-denominated deposit is:
A) 15.36%.
B) 12.00%.
C) 15.70%.
D) 14.35%.
E) none of the above
The following information refers to questions 25 and 26.
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:
CurrencyPercentage ChangeProbability
Trinidad dollar-1.0%35%
Trinidad dollar2.0%65%
Japanese yen-2.0%45%
Japanese yen1.0%55%

Lockboxes are post office box numbers assigned to employees for picking up their paychecks
A) true.
B) false.
10. Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of cross border transactions between subsidiaries.
A) true.
B) false.

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1. Consider a bank that acknowledges that it will make payments on behalf of a beer importer after the beer is delivered to the importer. This reflects:
A) accounts receivable financing.
B) Forfeiting
C) Factoring
D) a letter of credit
Answer: D) A Letter of Credits

2. Which of the following payment terms provides the supplier with the greatest degree of protection?
A) letters of credit.
B) Consignment
C) prepayment.
D) drafts (sight/time).
Answer: C) prepayment.

3. The ____________________ is a private corporation owned by a consortium of commercial banks and industrial companies, but the ______________ is a self-sustaining government agency. (Points: 3)
A) Overseas Private Investment Corporation (OPIC); Private Export Funding Corporation (PEFCO)
B) Private Export Funding Corporation (PEFCO); Overseas Private Investment Corporation (OPIC)
C) Private Export Funding Corporation (PEFCO); Ex-Imbank
D) Overseas ...

Solution Summary

This post will help students to clarify concepts related to short term assets and liability management.

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