Exam 10: Operating Exposure

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?

Swap agreements are treated as line items on the balance sheet via U.S. accounting methods.

The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes.

An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by paying for imports from Canada in Japanese yen. This hedging strategy is known as ________.

Intracompany leads and lags are generally more feasible than comparable intercompany activities because the favorable impact of the lead or lag for one company is the reverse for the other firm.

________ cash flows arise from intracompany and intercompany receivables and payments while ________ cash flows are payments for the use of loans and equity.

Operating cash flows may occur in different currencies and at different times, but financing cash flows may occur only in a single currency.

Diversification is possibly the best technique for reducing the problems associated with international transactions. Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk.

The Land's Beginning Company Inc. (LBC), imports extreme condition outdoor wear and equipment from The Hudson Bay Company (HBC) located in Canada. With the steady decline of the U.S dollar against the Canadian dollar LBC is finding a continued relationship with HBC to be an increasingly difficult proposition. In response to LBC's request, HBC has proposed the following risk-sharing arrangement. First, set the current spot rate as the base rate. As long as spot rates stay within 5% (up or down) LBC will pay at the base rate. Any rate outside of the 5% range, HBC will share equally with LBC the difference between the spot rate and the base rate. If the current spot rate is C$1.20/$, what are the upper and lower limits for trading to take place at C$1.20?

________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure.

Operating exposure

An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by seeking out potential suppliers in Japan. This hedging strategy is referred to as ________.

Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg , Manitoba, Canada. The current spot rate is $1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium, management would use today ________ when preparing operating budgets.

After being introduced in the 1980s, currency swaps have gained increasing importance as financial derivative instruments.

A ________ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts.

A U.S. timber products firm has a long-term contract to import unprocessed logs from Canada. To avoid occasional and unpredictable changes in the exchange rate between the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the impact of any exchange rate movement. This type of agreement is referred to as ________.

A British firm and a U.S. Corporation each wish to enter into a currency swap hedging agreement. The British firm is receiving U.S. dollars from sales in the U.S. but wants pounds. The U.S. firm is receiving pounds from sales in Britain but wants dollars. Which of the following choices would best satisfy the desires of the firms?

Which of the following is NOT an example of diversifying operations?

Historically, there has been a strong link between the volume of automobile exports from Japan to the US and the yen/dollar exchange rate.

Some firms use "leads" or "lags" to re-time the transfer of funds in international transactions. To benefit from changing exchange rates, firms holding a ________ currency will ________ their payments in an effort to maintain ownership of the strengthening currency as long as possible.