1. What are the two main ways a firm can tell one of its gathering banks (a bank that collects checks for the firmand takes daily cash deposits from the firm) to send collected funds to a cash concentration bank? How could the firm send funds from its gathering bank that are ledger balances today but are expected to be collected balances tomorrow? The two main ways a firm can tell one of its gathering banks to send collected funds to a cash concentration bank are electronic depository transfer (EDT) and wire transfer. An EDT, also known as an ACH debit, is made electronically at night on a day prior to when funds are made available to customers. The advantage is that collected funds are available at the concentration bank the day after the ACH debit is originated, regardless of the location of the gathering bank. A wire transfer represents a real-time transfer of account balances. They are relatively expensive and require collected funds (not just ledger balances) but are quicker. Largest banks operate24/7 internationally and always can do wire transfers. To send funds that are ledger balances today but will be collected balances tomorrow, a bank must use an ACH debit.2. Firms often import materials that are used in producing their output. Be able to explain how a German firm can make a payment to a U.S. firm (or vice versa) using the SWIFT message transfer system to pay for imported raw materials.SWIFT is the Society for Worldwide International Financial Telecommunications. It is a message transfer network, not a money transfer network. International transfers use SWIFT and bank correspondent “Due from” and “Due to” balances, which are demand deposit accounts held by other banks. For a German firm to make a payment to a US firm for imported raw materials, the German bank informs SWIFT and then SWIFT sends a message to the German bank telling it to “Debit German firm DDA __ Euros, credit due to US bank ___ Euros”. SWIFT also sends a message to the US bank. The US bank receives the message “Credit due from German bank ___ Dollars, credit US firm’s DDA ___ Dollars.” These transactions cost $20-$40 depending on volume and bid/ask spread. The current exchange rate is used to determine the dollars and euros involved in the transaction3. Given information on the expected daily cash needs of three separate subsidiaries of a large firm that currently each make deposits at a different bank, be able to calculate how much the firm may be able to save by having all three subsidiaries use a single bank for deposits and disbursements (decentralized versus centralized cash depositories).Each cash disbursing account has a standard deviation around its mean.Standard deviation for accounts 1 and 2: σ1 = √var1 and σ2 = √var2 Standard deviation for 2 accounts held as 1 account:σ1,2, = √var1,2 = √(w1)2 var1 + (w2)2 var2 + 2(w1)(w2) cov1,2 σ1,2, = √var1 + var2 (if wi = 1.0 & there is disbursement independence THEN COV1,2 = 0)Decentralized Cash E(cash needs) 1σ of needs (99% protection) Depositories/Accounts (A) (B) (C) = A + 3BBank Act 1 $10,000,000 $1,000,000 $13,000,000Bank Act 2 6,000,000 2,000,000 12,000,000 Bank Act 3 12,000,000 3,000,000 21,000,000 $28,000,000 $6,000,000 $46,000,000 mean σ mean + 3 σCentralized_______________________________________________Single Act $28,000,000 $3,741,657 $39,224,972 σ1,2,3, = √var1 + var2 + var3 = √(1M)2 + (2M)2 + (3M)2 = $3,741,657 $46,000,000- 39,224,972 Balance value saved = working capital saved $ 6,775,0284. How has Canada effectively eliminated float in their check collection process? How has this affected the incentives for firms when they disburse checks? In Canada, 6 banks hold 90% of total assets. They have effectively eliminated float in their check collection process having 1 day backdating of check settlement at the central bank which eliminates the 1 day float it takesto process/collect checks. By interbank agreement, they have same-day funds availability for deposited checks, so there is no availability float. Canada pays interest on demand deposit accounts, so there is less need for cash concentration arrangements. Also, banks will run an analysis of the float businesses generate in disbursing checks to suppliers/consumers and charge the bank for the mail/disbursement float created5. Know what a firm’s cash forecast is and why it is important. In a simple (linear) forecast of inventory needs based on projected sales, be able to compute the intercept and slope parameters by hand from past data on inventory and sales. Using your results be able to determine future inventory needs based on a given level of future sales.A firm’s cash forecast should be consistent with the firm’s operating budget, be accurate enough to minimize bank account overdrafts and indicate the need for short term credit/investments, have a forecast error less than +/- 3%, 95% of the time, and forecast cash receipts/disbursements on a monthly/2-week basis for 1 year into thefuture. Cash forecasts are important because they drive short term borrowing/investing decision and they can improve profits when accurate.X – axis = sales. Y – axis = inventories. Y = mx + b. m = (y1 – y2)/(x1-x2). B = y-interceptSST = ∑(Yi – Y)2 = total SS, the variation to be explained.SSR = ∑(Yi pred – Y)2 = regression SS, variation that is explained.SSE = ∑(Yi – Yi pred)2 = SS errors, the unexplained variation.SST = SSR + SSE so SST = 1.0 = SSR + SSE and R2 = SSR = 1 - SSE SST SST SST SST SST 6. Know what yield or revenue management is and why estimating a demand curve for a firm's product or service using regression analysis can increase revenue compared to charging the same price to all of a firm's customers. What condition has to be met for price discrimination to be effective? Explain. Revenue management is the ability to predict consumer behavior to optimize product availability and price