Question 1

One argument why exchange rate risk is irrelevant to corporations is that shareholders may be able to hedge this risk individually.

Accepted Answer

A) True 
 B)False

Question 2

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is not true regarding currency correlations?

Accepted Answer

A) Two highly positively correlated currencies act almost as if they are the same currency. 
B) If two inflow currencies are highly positively correlated, transaction exposure is somewhat offset. 
C) If two inflow currencies are negatively correlated, transaction exposure is somewhat offset. 
D) If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset. 
A) Two highly positively correlated currencies act almost as if they are the same currency. 
B) If two inflow currencies are highly positively correlated, transaction exposure is somewhat offset. 
C) If two inflow currencies are negatively correlated, transaction exposure is somewhat offset. 
D) If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset.

Question 4

A firm produces products for which substitute products are produced in all countries. Appreciation of the firm's local currency should:

Accepted Answer

A) increase local sales as it reduces foreign competition in local markets. 
B) increase the firm's exports denominated in the local currency. 
C) increase the returns earned on the firm's foreign bank deposits. 
D) increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. 
E) none of the above 
A) increase local sales as it reduces foreign competition in local markets. 
B) increase the firm's exports denominated in the local currency. 
C) increase the returns earned on the firm's foreign bank deposits. 
D) increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. 
E) none of the above

Question 5

Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VaR) method based on a 97.5 percent confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.35.

Accepted Answer

A) -$4,303 
B) -$7,830 
C) -$5,873 
D) -$1,958 
A) -$4,303 
B) -$7,830 
C) -$5,873 
D) -$1,958

Question 6

Assume that Mill Corp., a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements:
$ \mathrm{PCF}_{t}=a_{0}+a_{1} e_{t}+\mu t $where the term on the leFt-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a₁ of 2. This indicates that:

Accepted Answer

A) if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%. 
B) if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%. 
C) if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%. 
D) if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%. 
E) none of the above 
A) if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%. 
B) if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%. 
C) if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%. 
D) if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%. 
E) none of the above

Question 7

Economic exposure refers to:

Accepted Answer

A) the exposure of a firm's international transactions to exchange rate fluctuations. 
B) the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C) the exposure of a firm's financial statements to exchange rate fluctuations. 
D) the exposure of a firm's cash flows to exchange rate fluctuations. 
E) the exposure of a country's economy (specifically GNP) to exchange rate fluctuations. 
A) the exposure of a firm's international transactions to exchange rate fluctuations. 
B) the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C) the exposure of a firm's financial statements to exchange rate fluctuations. 
D) the exposure of a firm's cash flows to exchange rate fluctuations. 
E) the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.

Question 8

Which of the following is not true regarding economic exposure?

Accepted Answer

A) Even purely domestic firms can be affected by economic exposure. 
B) In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. 
C) The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm. 
D) The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected. 
E) All of the above are true. 
A) Even purely domestic firms can be affected by economic exposure. 
B) In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. 
C) The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm. 
D) The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected. 
E) All of the above are true.

Question 9

Magent Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:

Accepted Answer

A) benefit, because the dollar value of its SF position exceeds the dollar value of its DK position. 
B) benefit, because the dollar value of its DK position exceeds the dollar value of its SF position. 
C) be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position. 
D) be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position. 
A) benefit, because the dollar value of its SF position exceeds the dollar value of its DK position. 
B) benefit, because the dollar value of its DK position exceeds the dollar value of its SF position. 
C) be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position. 
D) be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

Question 10

The VaR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.

Accepted Answer

A) True 
 B)False

Question 11

Transaction exposure reflects:

Accepted Answer

A) the exposure of a firm's internationall transactions to exchange rate fluctuations. 
B) the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C) the exposure of a firm's financial statements to exchange rate fluctuations. 
D) the exposure of a firm's cash flows to exchange rate fluctuations. 
A) the exposure of a firm's internationall transactions to exchange rate fluctuations. 
B) the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C) the exposure of a firm's financial statements to exchange rate fluctuations. 
D) the exposure of a firm's cash flows to exchange rate fluctuations.

Question 12

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is not a form of exposure to exchange rate fluctuations?

Accepted Answer

A) transaction exposure 
B) credit exposure 
C) economic exposure 
D) translation exposure 
A) transaction exposure 
B) credit exposure 
C) economic exposure 
D) translation exposure

Question 14

Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP); 25 percent of the MNC's funds are Taiwan dollars and 75 percent are pounds. The standard deviation of exchange movements is 7 percent for Taiwan dollars and 5 percent for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:

Accepted Answer

A) 5.13 percent. 
B) 2.63 percent. 
C) 4.33 percent. 
D) 5.55 percent. 
A) 5.13 percent. 
B) 2.63 percent. 
C) 4.33 percent. 
D) 5.55 percent.

Question 15

U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margins.

Accepted Answer

A) True 
 B)False

Question 16

A firm produces products for which substitute products are produced in all countries. Depreciation of the firm's local currency should:

Accepted Answer

A) decrease local sales as foreign competition in local markets is reduced. 
B) decrease the firm's exports denominated in the local currency. 
C) decrease the returns earned on the firm's foreign bank deposits. 
D) decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. 
E) none of the above 
A) decrease local sales as foreign competition in local markets is reduced. 
B) decrease the firm's exports denominated in the local currency. 
C) decrease the returns earned on the firm's foreign bank deposits. 
D) decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. 
E) none of the above

Question 17

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

Accepted Answer

A) True 
 B)False

Question 18

An MNC's stock valuation will not be affected by translation exposure if the MNC's consolidated financial statements are prepared according to the accounting rules in FASB 52.

Accepted Answer

A) True 
 B)False

Question 19

Treck Co. expects to pay €200,000 in one month for its imports from Spain. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VaR) method based on a 95 percent confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is -2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23.

Accepted Answer

A) -$38,468 
B) -$21,371 
C) -$17,097 
D) -$4,274 
A) -$38,468 
B) -$21,371 
C) -$17,097 
D) -$4,274

Question 20

An MNC can avoid translation exposure if its foreign subsidiaries do not remit their earnings to the parent.

Accepted Answer

A) True 
 B)False

One argument why exchange rate risk is irrelevant to corporations is that shareholders may be able to hedge this risk individually.

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.

Which of the following is not true regarding currency correlations?

A firm produces products for which substitute products are produced in all countries. Appreciation of the firm's local currency should:

Economic exposure refers to:

Which of the following is not true regarding economic exposure?

The VaR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.

Transaction exposure reflects:

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

Which of the following is not a form of exposure to exchange rate fluctuations?

U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margins.

A firm produces products for which substitute products are produced in all countries. Depreciation of the firm's local currency should:

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

An MNC's stock valuation will not be affected by translation exposure if the MNC's consolidated financial statements are prepared according to the accounting rules in FASB 52.

An MNC can avoid translation exposure if its foreign subsidiaries do not remit their earnings to the parent.

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

One argument why exchange rate risk is irrelevant to corporations is that shareholders may be able to hedge this risk individually.

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.

Which of the following is not true regarding currency correlations?

A firm produces products for which substitute products are produced in all countries. Appreciation of the firm's local currency should:

Economic exposure refers to:

Which of the following is not true regarding economic exposure?

The VaR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.

Transaction exposure reflects:

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

Which of the following is not a form of exposure to exchange rate fluctuations?

U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margins.

A firm produces products for which substitute products are produced in all countries. Depreciation of the firm's local currency should:

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

An MNC's stock valuation will not be affected by translation exposure if the MNC's consolidated financial statements are prepared according to the accounting rules in FASB 52.

An MNC can avoid translation exposure if its foreign subsidiaries do not remit their earnings to the parent.

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