Question 1

With regard to operational hedging versus financial hedging,

Accepted Answer

A) operational hedging provides a more stable long-term approach than does financial hedging. 
B) financial hedging, when instituted on a rollover basis, is a superior long-term approach to operational hedging. 
C) since they both have the same goal, stabilizing the firm's cash flows in domestic currency, they are fungible in use. 
D) none of the above 
A) operational hedging provides a more stable long-term approach than does financial hedging. 
B) financial hedging, when instituted on a rollover basis, is a superior long-term approach to operational hedging. 
C) since they both have the same goal, stabilizing the firm's cash flows in domestic currency, they are fungible in use. 
D) none of the above A

Question 2

Suppose a U.S.firm has an asset in Italy whose local currency price is random.For simplicity,suppose there are only three states of the world and each state is equally likely to occur.The future local currency price of this asset (P*)as well as the future exchange rate (S)will be determined,depending on the realized state of the world.   Assume that you choose to "hedge" this asset by selling forward the expected value of the euro denominated cash flow at F1($/£)= $1.50/€.Calculate your cash flows in each of the possible states.

Accepted Answer

A) $1,400, $1,400, $1,400 
B) $1,496.6, $1,400, $1,306.40 
C) $1,404, $1,404.$1,404 
D) None of the above 
A) $1,400, $1,400, $1,400 
B) $1,496.6, $1,400, $1,306.40 
C) $1,404, $1,404.$1,404 
D) None of the above A

Question 3

The price elasticity of demand for commodity products tends to be

Accepted Answer

A) highly elastic. 
B) highly inelastic. 
C) both a) and b) 
D) none of the above 
A) highly elastic. 
B) highly inelastic. 
C) both a) and b) 
D) none of the above A

Question 4

Which of the following conclusions are correct?

Accepted Answer

A) Most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 0 ($)2 and 0 ($)2 respectively. 
B) None of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 0 ($)2 and 0 ($)2 respectively. 
C) Most of the volatility of the dollar value of the British asset cannot be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. 
D) Most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. 
A) Most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 0 ($)2 and 0 ($)2 respectively. 
B) None of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 0 ($)2 and 0 ($)2 respectively. 
C) Most of the volatility of the dollar value of the British asset cannot be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively. 
D) Most of the volatility of the dollar value of the British asset can be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 125,000 ($)2 and -127,500 ($)2 respectively.

Question 5

Consider a U.S.MNC who owns a foreign asset.If the foreign currency value of the asset is inversely related to changes in the dollar-foreign currency exchange rate,

Accepted Answer

A) the company has a built-in hedge. 
B) the dollar value variability that is independent of exchange rate movements. 
C) both a) and b) 
D) none of the above 
A) the company has a built-in hedge. 
B) the dollar value variability that is independent of exchange rate movements. 
C) both a) and b) 
D) none of the above

Question 6

Consider a U.S.MNC with operations in Great Britain.Which of the following are potential risks following a strengthening of the dollar?

Accepted Answer

A) A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's competitive position in the marketplace. 
B) A given operating cash flow in pounds will be converted into a lower dollar amount after the pound depreciation. 
C) Both a) and b) 
D) None of the above 
A) A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's competitive position in the marketplace. 
B) A given operating cash flow in pounds will be converted into a lower dollar amount after the pound depreciation. 
C) Both a) and b) 
D) None of the above

Question 7

From the perspective of the U.S.firm that owns an asset in Britain,the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S using the regression equation   is

Accepted Answer

A) asset exposure. 
B) operating exposure. 
C) accounting exposure. 
D) none of the above 
A) asset exposure. 
B) operating exposure. 
C) accounting exposure. 
D) none of the above

Question 8

The exposure coefficient   in the regression   informs

Accepted Answer

A) how much of a foreign currency to sell forward. 
B) the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. 
C) captures the residual part of the dollar value variability that is independent of exchange rate movements. 
D) how many call options to write. 
A) how much of a foreign currency to sell forward. 
B) the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. 
C) captures the residual part of the dollar value variability that is independent of exchange rate movements. 
D) how many call options to write.

Question 9

Suppose the U.S.dollar substantially depreciates against the Japanese yen.The change in exchange rate

Accepted Answer

A) can have significant economic consequences for U.S.firms. 
B) can have significant economic consequences for Japanese firms. 
C) can have significant economic consequences for both U.S.and Japanese firms. 
D) none of the above 
A) can have significant economic consequences for U.S.firms. 
B) can have significant economic consequences for Japanese firms. 
C) can have significant economic consequences for both U.S.and Japanese firms. 
D) none of the above

Question 10

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can

Accepted Answer

A) not mitigate the effects of exchange rate changes. 
B) lessen the effect of exchange rate changes by sourcing from where input costs are low. 
C) focus on selling commodity products with product differentiation. 
D) pursue a strategy of increasing its products price elasticity of demand. 
A) not mitigate the effects of exchange rate changes. 
B) lessen the effect of exchange rate changes by sourcing from where input costs are low. 
C) focus on selling commodity products with product differentiation. 
D) pursue a strategy of increasing its products price elasticity of demand.

Question 11

Consider a U.S.-based MNC with a wholly-owned Italian subsidiary.Following a depreciation of the dollar against the euro,which of the following conclusions are correct?

Accepted Answer

A) The cash flow in euro could be altered due an alteration in the firm's competitive position in the marketplace. 
B) A given operating cash flow in euro will be converted to a higher U.S.dollar cash flow. 
C) Both a) and b) 
D) None of the above 
A) The cash flow in euro could be altered due an alteration in the firm's competitive position in the marketplace. 
B) A given operating cash flow in euro will be converted to a higher U.S.dollar cash flow. 
C) Both a) and b) 
D) None of the above

Question 12

Which of the following would be an effective hedge?

Accepted Answer

A) Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
B) Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
C) Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
D) None of the above 
A) Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
B) Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
C) Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
D) None of the above

Question 13

The link between a firm's future operating cash flows and exchange rate fluctuations is

Accepted Answer

A) asset exposure 
B) operating exposure 
C) both a) and b) 
D) none of the above 
A) asset exposure 
B) operating exposure 
C) both a) and b) 
D) none of the above

Question 14

The extent to which the firm's operating cash flows would be affected by random changes in exchange rates is called

Accepted Answer

A) asset exposure 
B) operating exposure 
C) both a) and b) 
D) none of the above 
A) asset exposure 
B) operating exposure 
C) both a) and b) 
D) none of the above

Question 15

Which of the following would be an effective hedge?

Accepted Answer

A) Sell £2,278.13 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
B) Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
C) Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
D) None of the above 
A) Sell £2,278.13 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
B) Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
C) Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
D) None of the above

Question 16

Generally speaking,a firm is subject to high degrees of operating exposure

Accepted Answer

A) when its costs are sensitive to exchange rate changes. 
B) when its prices are sensitive to exchange rate changes. 
C) when either its cost or its price is sensitive to exchange rate changes. 
D) none of the above 
A) when its costs are sensitive to exchange rate changes. 
B) when its prices are sensitive to exchange rate changes. 
C) when either its cost or its price is sensitive to exchange rate changes. 
D) none of the above

Question 17

The exposure coefficient in the regression   is given by:

Accepted Answer

A)    
B)    
C)    
A)    
B)    
C)

Question 18

In recent years,

Accepted Answer

A) the U.S.dollar has appreciated substantially against most major currencies of the world, especially against the euro. 
B) the U.S.dollar has depreciated substantially against most major currencies of the world, especially against the euro. 
C) the U.S.dollar has maintained its value against most major currencies of the world, especially against the euro. 
A) the U.S.dollar has appreciated substantially against most major currencies of the world, especially against the euro. 
B) the U.S.dollar has depreciated substantially against most major currencies of the world, especially against the euro. 
C) the U.S.dollar has maintained its value against most major currencies of the world, especially against the euro.

Question 19

Developing multiple production sites in a variety of countries,

Accepted Answer

A) can create an excess capacity problem. 
B) can lead to underutilization of domestic plants. 
C) can lead to domestic job losses. 
D) all of the above 
A) can create an excess capacity problem. 
B) can lead to underutilization of domestic plants. 
C) can lead to domestic job losses. 
D) all of the above

Question 20

A foreign country could provide low cost production sites

Accepted Answer

A) because the factors of production are underpriced. 
B) because the currency is undervalued. 
C) because the locals like to give away their land labor and capital to foreigners. 
D) both a) and b) 
A) because the factors of production are underpriced. 
B) because the currency is undervalued. 
C) because the locals like to give away their land labor and capital to foreigners. 
D) both a) and b)

With regard to operational hedging versus financial hedging,

The price elasticity of demand for commodity products tends to be

Which of the following conclusions are correct?

Consider a U.S.MNC who owns a foreign asset.If the foreign currency value of the asset is inversely related to changes in the dollar-foreign currency exchange rate,

Consider a U.S.MNC with operations in Great Britain.Which of the following are potential risks following a strengthening of the dollar?

From the perspective of the U.S.firm that owns an asset in Britain,the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S using the regression equation is

The exposure coefficient in the regression informs

Suppose the U.S.dollar substantially depreciates against the Japanese yen.The change in exchange rate

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can

Consider a U.S.-based MNC with a wholly-owned Italian subsidiary.Following a depreciation of the dollar against the euro,which of the following conclusions are correct?

Which of the following would be an effective hedge?

The link between a firm's future operating cash flows and exchange rate fluctuations is

The extent to which the firm's operating cash flows would be affected by random changes in exchange rates is called

Which of the following would be an effective hedge?

Generally speaking,a firm is subject to high degrees of operating exposure

The exposure coefficient in the regression is given by:

In recent years,

Developing multiple production sites in a variety of countries,

A foreign country could provide low cost production sites

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

Exam 9: Management of Economic Exposure

With regard to operational hedging versus financial hedging,

The price elasticity of demand for commodity products tends to be

Which of the following conclusions are correct?

Consider a U.S.MNC who owns a foreign asset.If the foreign currency value of the asset is inversely related to changes in the dollar-foreign currency exchange rate,

Consider a U.S.MNC with operations in Great Britain.Which of the following are potential risks following a strengthening of the dollar?

From the perspective of the U.S.firm that owns an asset in Britain,the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S using the regression equation is

The exposure coefficient in the regression informs

Suppose the U.S.dollar substantially depreciates against the Japanese yen.The change in exchange rate

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can

Consider a U.S.-based MNC with a wholly-owned Italian subsidiary.Following a depreciation of the dollar against the euro,which of the following conclusions are correct?

Which of the following would be an effective hedge?

The link between a firm's future operating cash flows and exchange rate fluctuations is

The extent to which the firm's operating cash flows would be affected by random changes in exchange rates is called

Which of the following would be an effective hedge?

Generally speaking,a firm is subject to high degrees of operating exposure

The exposure coefficient in the regression is given by:

In recent years,

Developing multiple production sites in a variety of countries,

A foreign country could provide low cost production sites

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters