Exam 11: Operating Exposure

An unexpected change in exchange rates impacts a firm's expected cash flows at four levels; a) the short run, b) medium run: equilibrium, c) medium run: disequilibrium, and d) the long run. Describe the impact on cash flows over each of these categories identifying the time frame for each as well as the price changes, volume changes, and structural changes associated with each stage.

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.

A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet.

Management must be able to predict disequilibria in international markets to take advantage of diversification strategies.

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

An expected change in foreign exchange rates is not included in the definition of operating exposure, because both management and investors should have factored this information into their evaluation of anticipated operating results and market value. Describe how the expected change in foreign exchange rates would be reflected in the decision-making process from the perspective of a) management, b) debt service, c) the investor, and d) the broader macroeconomic perspective.

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

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?

Which of the following is NOT one of the commonly employed financial policies used to manage operating and transaction exposure?

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

Which of the following is NOT an example of a financial cash flow?

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

Which of the following is NOT identified by your authors as a proactive management technique to reduce exposure to foreign exchange risk?

Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria because

Net operating exposure

One of the main risks eliminated with Cross-Currency Swaps once compared to back-to-back loans is

Cash flow matching can be effective hedging technique when

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.

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

An advantage of international diversification is the