Question 1

Which of the following operations benefit(s) from depreciation of the firm's local currency?

Accepted Answer

A) borrowing in a foreign country and converting the funds to the local currency prior to the depreciation 
B) purchasing foreign supplies 
C) investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency 
D) A and B 
A) borrowing in a foreign country and converting the funds to the local currency prior to the depreciation 
B) purchasing foreign supplies 
C) investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency 
D) A and B C

Question 2

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

Accepted Answer

A) True 
 B)False  False

Question 3

Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last fiFS1U1B1tS1U1B0y months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.
-Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.

Accepted Answer

A) -9.00 percent 
B) -30.00 percent. 
C) -5.00 percent 
D) none of the above 
A) -9.00 percent 
B) -30.00 percent. 
C) -5.00 percent 
D) none of the above A

Question 4

The maximum one-day loss estimated using the value-at-risk (VaR) method is independent of the confidence level used.

Accepted Answer

A) True 
 B)False

Question 5

Currency correlations are generally negative.

Accepted Answer

A) True 
 B)False

Question 6

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.

Accepted Answer

A) weak; somewhat stable 
B) weak; favorably affected 
C) weak; adversely affected 
D) none of the above 
A) weak; somewhat stable 
B) weak; favorably affected 
C) weak; adversely affected 
D) none of the above

Question 7

U.S. based Majestic Co. sells products to U.S. consumers and purchases all of its materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:

Accepted Answer

A) economic exposure. 
B) translation exposure. 
C) transaction exposure. 
D) no exposure to exchange rate fluctuations. 
A) economic exposure. 
B) translation exposure. 
C) transaction exposure. 
D) no exposure to exchange rate fluctuations.

Question 8

Under FASB 52:

Accepted Answer

A) translation gains and losses are included in the reported net income. 
B) translation gains and losses are included in stockholder's equity. 
C) A and B 
D) none of the above 
A) translation gains and losses are included in the reported net income. 
B) translation gains and losses are included in stockholder's equity. 
C) A and B 
D) none of the above

Question 9

Economic exposure can affect:

Accepted Answer

A) MNCs only. 
B) purely domestic firms only. 
C) A and B 
D) none of the above 
A) MNCs only. 
B) purely domestic firms only. 
C) A and B 
D) none of the above

Question 10

If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.

Accepted Answer

A) True 
 B)False

Question 11

A set of currency cash inflows is more volatile if the correlations are low.

Accepted Answer

A) True 
 B)False

Question 12

Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last fiFS1U1B1tS1U1B0y months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.
-Refer to Exhibit 10-2. What is the portfolio standard deviation?​

Accepted Answer

A) 3.00% 
B) 5.44 percent 
C) 17.98 percent 
D) none of the above 
A) 3.00% 
B) 5.44 percent 
C) 17.98 percent 
D) none of the above

Question 13

Assume that exchange rate movements were unusually stable in a recent period (but will not continue to be so stable in the future) that was used to derive the estimated maximum expected loss based on the VaR method. The estimated expected loss derived using VaR based on that recent period will likely overestimate the actual maximum expected loss in the future.

Accepted Answer

A) True 
 B)False

Question 14

A purely domestic firm is never exposed to exchange rate fluctuations.

Accepted Answer

A) True 
 B)False

Question 15

____ is (are) not a determinant of translation exposure.

Accepted Answer

A) The MNC's degree of foreign involvement 
B) The locations of foreign subsidiaries 
C) The local (domestic) earnings of the MNC 
D) The accounting methods used 
A) The MNC's degree of foreign involvement 
B) The locations of foreign subsidiaries 
C) The local (domestic) earnings of the MNC 
D) The accounting methods used

Question 16

A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.

Accepted Answer

A) True 
 B)False

Question 17

A reduction in hedging will probably reduce transaction exposure.

Accepted Answer

A) True 
 B)False

Question 18

Assume a regression model in which the dependent variable is the firm's stock price percentage change, and the independent variable is the percentage change in the foreign currency. The coefficient is negative. This implies that the company's stock price increases if the foreign currency appreciates.

Accepted Answer

A) True 
 B)False

Question 19

Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

Accepted Answer

A) Diz Co. 
B) Yanta Co. 
C) The firms have about the same level of exposure. 
D) Neither firm has any exposure. 
A) Diz Co. 
B) Yanta Co. 
C) The firms have about the same level of exposure. 
D) Neither firm has any exposure.

Question 20

Purely domestic firms are never affected by economic exposure.

Accepted Answer

A) True 
 B)False

Which of the following operations benefit(s) from depreciation of the firm's local currency?

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

The maximum one-day loss estimated using the value-at-risk (VaR) method is independent of the confidence level used.

Currency correlations are generally negative.

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During dollar cycles, cash outflows are .

U.S. based Majestic Co. sells products to U.S. consumers and purchases all of its materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:

Under FASB 52:

Economic exposure can affect:

If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.

A set of currency cash inflows is more volatile if the correlations are low.

A purely domestic firm is never exposed to exchange rate fluctuations.

____ is (are) not a determinant of translation exposure.

A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.

A reduction in hedging will probably reduce transaction exposure.

Purely domestic firms are never affected by economic exposure.

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 10: Measuring Exposure to Exchange Rate Fluctuations

Which of the following operations benefit(s) from depreciation of the firm's local currency?

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

The maximum one-day loss estimated using the value-at-risk (VaR) method is independent of the confidence level used.

Currency correlations are generally negative.

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.

U.S. based Majestic Co. sells products to U.S. consumers and purchases all of its materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:

Under FASB 52:

Economic exposure can affect:

If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.

A set of currency cash inflows is more volatile if the correlations are low.

A purely domestic firm is never exposed to exchange rate fluctuations.

____ is (are) not a determinant of translation exposure.

A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.

A reduction in hedging will probably reduce transaction exposure.

Purely domestic firms are never affected by economic exposure.

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During dollar cycles, cash outflows are .