Finance 4412 Short Term Financial Management Topic Outline for Second Exam 1 What are the two main ways a firm can tell one of its gathering banks a bank that collects checks for the firm and 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 a Automated Clearing House Debit next day availability Day 2 a Made electronically at night on day prior to when funds are made available to customers b Wire Transfer same day Day 1 a Good funds when transfer is received Largest banks operate all times of normal day c Transfer all ledger 1 day balances using an ACH debit because they are next day funds and are 24 7 internationally thus are good when received 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 a SWIFT Society for Worldwide International Financial Telecommunications a A message transfer network money does not move among countries b International transfers use SWIFT and bank correspondent Due from and Due to balances demand deposit accounts held by other banks Holdover from letter writing correspondent c X leg is the asset account of a domestic firm s assets where X is the domestic currency d DDA Funds held in an account from which deposited funds can be withdrawn at any time without any advance notice to the depository institution Demand deposits can be demanded by an account holder at any time 3 Given information on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 4 How has Canada effectively eliminated float in their check collection process How has this affected the incentives for firms when they disburse checks float a 6 nationwide banks in Canada 90 of TA vs 380 banks in US 90 if TA b Easy to collect checks for presentment and firms are charged for the float they create 1 day mail c Geography 1 day to process collect checks But eliminated by 1 day backdating of central bank settlement so no processing collection float d Same day funds availability for deposited checks by interbank agreement no availability float e Canada pays interest on DDA so less need for cash concentration arrangements f Since firms are charged for the float they create firms are incentivized to disburse checks at the proper time when the check is needed 5 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 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 a In order for price discrimination to be effective there has to be multiple segments in a given market If everyone s demand is equally influenced by all variables price discrimination doesn t work b As seen in the second slide if a firm uses regression analysis to determine demand and elasticity it can utilize price discrimination selling at two prices as opposed to just one to earn more revenue 7 Know what financial instruments comprise the money market and how strongly their returns are correlated over time Know what a yield curve is and how it generally looks most of the time Also understand and be able to explain how the Federal Reserve uses open market operations to control the overnight federal funds rate to a desired target level Contrast the U S approach for controlling short term interest rates with how the European Central Bank operates to do the same thing a MMMFs Money Market Mutual Funds b The Federal Reserve is able to influence the overnight Federal funds rate through Open Market Operations buying and selling government securities See pictures below to see how and the comparison to the European interest rates 8 Know what the unbiased expectations hypothesis is and be able to apply it to a yield curve to determine the implied forecast of future interest rates for different maturities that are embedded in the slope of a yield curve Know the liquidity premium and market segmentation hypotheses and how they too may influence or explain the slope of a yield curve a Remember This is a geometric average not a simple average You can t just add and divide by 2 9 Know how to determine the returns if a firm decides to ride the yield curve when making a short term investment decision a Make sure you know interest forecasting from question 8 as it will be necessary to compute the following examples