Question

What are blocked funds? List and explain the three methods the authors list in this chapter for dealing with blocked funds.

Answer 1

Blocked funds are funds that are temporarily unavailable for use due to legal or regulatory restrictions. The authors list three methods for dealing with blocked funds: allowance method, investment method, and collateralization method.

Step-by-step explanation:

Blocked funds refer to funds that are temporarily unavailable for use due to legal or regulatory restrictions. Blocked funds refer to money generated by a company in a foreign country that cannot be transferred to the company's home country due to restrictions imposed by the foreign government. The provided content does not list specific methods for dealing with blocked funds, rather it discusses financial investment options for households and methods for accumulating wealth. However, generally, there are three common strategies that firms might use to handle blocked funds.

The authors list three methods for dealing with blocked funds:

Allowance method: This method involves setting aside a portion of the blocked funds as a provision to cover potential losses. The remaining funds can still be used for other purposes.

Investment method: With this method, the blocked funds are invested in low-risk and liquid assets that can be easily converted back into cash when needed.

Collateralization method: This method involves using the blocked funds as collateral to secure a loan or credit facility. The funds are not accessed directly but provide security for the lender.

Answer 2

Blocked funds are money that cannot be transferred to a parent company due to foreign government restrictions. While the text does not list specific methods, companies typically use leading and lagging, reinvesting, or transfer pricing as strategies to manage blocked funds.

Step-by-step explanation:

Blocked funds refer to money generated by a company's foreign operations that cannot be transferred to the parent company due to restrictions imposed by the host country's government. These restrictions are often a form of capital control to prevent capital flight, which can have adverse effects on the local economy.

The text does not explicitly list three methods for dealing with blocked funds. However, generally speaking, there are several common methods that companies may employ:

• Leading and Lagging: Adjusting the timing of payments to and from the subsidiary to take advantage of anticipated changes in exchange rates or regulations.
• Reinvesting: Allocating the blocked funds to local operations for expansion or acquisition within the country, thus utilising the funds efficiently.
• Transfer Pricing: Setting the prices of transactions between the parent company and its subsidiary to move profits to or from the subsidiary.

These methods aim to minimize the negative impact of blocked funds on a company's liquidity and profitability.