19. Assume that in recent months, most currencies of industrialized countries depreciated substantially against the dollar. Assume that their interest rates were similar to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during this period, their effective yield would have been:A) negative.B) zero.C)positive, but less than the interest rate of their respective countries.D)more than the interest rate of their respective countries.ANSWER:

D 20. 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.

D 21. 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.

A

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90International Financial Management22.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?

B

23.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 informationANSWER: SOLUTION: If interest rate parity holds, the Australian citizen will be able to earn approximately his or her domestic interest rate.

B

24.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:

D

Chapter 21: International Cash Management91

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 Change