Question 1

The "exposure" (i.e.the regression coefficient beta)is: Hint: Calculate the expression

Accepted Answer

A) 7,500 
B) 2,5000 
C) -2,500 
D) none of the above 
A) 7,500 
B) 2,5000 
C) -2,500 
D) none of the above

Question 2

Which of the following is false?

Accepted Answer

A) The competitive effect is that a depreciation may affect operating cash flow in the foreign currency by altering the firm's competitive position in the marketplace. 
B) The conversion effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation. 
C) The competitive effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation. 
D) None of the above 
A) The competitive effect is that a depreciation may affect operating cash flow in the foreign currency by altering the firm's competitive position in the marketplace. 
B) The conversion effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation. 
C) The competitive effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation. 
D) None of the above

Question 3

Suppose a U.S.firm has an asset in Britain 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 British asset (P*)as well as the future exchange rate (S)will be determined,depending on the realized state of the world.   Which of the following statements is most correct?

Accepted Answer

A) The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated. 
B) The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated. 
C) The firm's exchange rate exposure can be completely hedged with derivatives written on the British pound. 
D) Since randomness is involved, no hedging is possible. 
A) The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated. 
B) The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated. 
C) The firm's exchange rate exposure can be completely hedged with derivatives written on the British pound. 
D) Since randomness is involved, no hedging is possible.

Question 4

A U.S. firm holds an asset in Great Britain and faces the following scenario:   where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
-The expected value of the investment in U.S.dollars is:

Accepted Answer

A) $5,050 
B) $4,500 
C) $2,112.50 
D) none of the above 
A) $5,050 
B) $4,500 
C) $2,112.50 
D) none of the above

Question 5

Two studies found a link between exchange rates and the stock prices of U.S.firms,

Accepted Answer

A) this suggests that exchange rate changes can systematically affect the value of the firm by influencing its operating cash flows. 
B) this suggests that exchange rate changes can systematically affect the value of the firm by influencing the domestic currency values of its assets and liabilities. 
C) both a) and b) 
D) none of the above 
A) this suggests that exchange rate changes can systematically affect the value of the firm by influencing its operating cash flows. 
B) this suggests that exchange rate changes can systematically affect the value of the firm by influencing the domestic currency values of its assets and liabilities. 
C) both a) and b) 
D) none of the above

Question 6

The price elasticity of demand for unique 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

Question 7

Suppose a U.S.firm has an asset in Britain 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 British asset (P*)as well as the future exchange rate (S)will be determined,depending on the realized state of the world.   Which of the following statements is most correct?

Accepted Answer

A) The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated. 
B) The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated. 
C) The firm's exchange rate exposure can be completely hedged with derivatives written on the British pound. 
D) Since randomness is involved, no hedging is possible. 
A) The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated. 
B) The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated. 
C) The firm's exchange rate exposure can be completely hedged with derivatives written on the British pound. 
D) Since randomness is involved, no hedging is possible.

Question 8

If the stock market of a foreign country is consistently up when the dollar value of the currency is down,

Accepted Answer

A) there may not be a great deal of exchange rate risk for a U.S.-based investor. 
B) there will be a great deal of exchange rate risk for a U.S.-based investor. 
C) then investors can ignore diversification. 
D) none of the above 
A) there may not be a great deal of exchange rate risk for a U.S.-based investor. 
B) there will be a great deal of exchange rate risk for a U.S.-based investor. 
C) then investors can ignore diversification. 
D) none of the above

Question 9

Goldman Sachs estimates that as much as __% of the pretax profits that Porsche reported for a recent fiscal year came from skillfully executing currency options.

Accepted Answer

A) 5% 
B) 10% 
C) 15% 
D) 75% 
A) 5% 
B) 10% 
C) 15% 
D) 75%

Question 10

If the domestic currency is strong or expected to become strong,

Accepted Answer

A) a firm can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or underpriced factors of production. 
B) a firm should curtail R&D efforts until the exchange rate situation improves. 
C) a firm should abandon international sales and focus on domestic market share. 
D) the firm should focus on profiting in the currency futures market based on its forecasts. 
A) a firm can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or underpriced factors of production. 
B) a firm should curtail R&D efforts until the exchange rate situation improves. 
C) a firm should abandon international sales and focus on domestic market share. 
D) the firm should focus on profiting in the currency futures market based on its forecasts.

Question 11

A U.S. firm holds an asset in Great Britain and faces the following scenario:   where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
-The variance of the exchange rate is:

Accepted Answer

A) 0.0200 
B) 0.101875 
C) 0.002 
D) none of the above 
A) 0.0200 
B) 0.101875 
C) 0.002 
D) none of the above

Question 12

A purely domestic firm that sources and sells only domestically,

Accepted Answer

A) faces exchange rate risk to the extent that it has international competitors in the domestic market. 
B) faces no exchange rate risk. 
C) should never hedge since this could actually increase its currency exposure. 
D) both b) and c) 
A) faces exchange rate risk to the extent that it has international competitors in the domestic market. 
B) faces no exchange rate risk. 
C) should never hedge since this could actually increase its currency exposure. 
D) both b) and c)

Question 13

On the basis of regression Equation   
we can decompose the variability of the dollar value of the asset,Var(P),into two separate components.

Accepted Answer

A) Cov(P,S) = b2 *Var(P) + Var(S) 
B) Var(P) = b2 * Var(S) + Var(e) 
C) Cov(P,S) = b2 * Cov(S,P) + Cov(S,e) 
D) Var(P) = b2 *Var(S) 
E) None of the above 
A) Cov(P,S) = b2 *Var(P) + Var(S) 
B) Var(P) = b2 * Var(S) + Var(e) 
C) Cov(P,S) = b2 * Cov(S,P) + Cov(S,e) 
D) Var(P) = b2 *Var(S) 
E) None of the above

Question 14

Find an effective hedge financial hedge if a U.S.firm holds an asset in Great Britain and faces the following scenario:   P* = Pound sterling price of the asset held by the U.S.firm P = Dollar price of the same asset
The CFO runs a regression of the form   .
The regression coefficient beta is calculated as   Where   The variance of the exchange rate is calculated as:   The expected value of the investment in U.S.dollars is:
E[P] = 0.25* $6,600 + 0.50 * $5,000 + 0.25 * $3,600 = $5,050
Which of the following is the most effective hedge financial hedge?

Accepted Answer

A) Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
B) Buy £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
C) Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
D) 0.25 *£3,000 + 0.50 * £2,500 + 0.25 * £2,000 = £2,500 
A) Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
B) Buy £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
C) Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
D) 0.25 *£3,000 + 0.50 * £2,500 + 0.25 * £2,000 = £2,500

Question 15

On the basis of regression Equation   we can decompose the variability of the dollar value of the asset,Var(P),into two separate components Var(P)= b2 *Var(S)+ Var(e) The first term in the right-hand side of the equation,b2 *Var(S)represents

Accepted Answer

A) the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. 
B) captures the residual part of the dollar value variability that is independent of exchange rate movements. 
C) none of the above 
A) the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. 
B) captures the residual part of the dollar value variability that is independent of exchange rate movements. 
C) none of the above

Question 16

Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.

Accepted Answer

The answer of Compute the variance of the dollar value...

Question 17

The firm may not be subject to high degrees of operating exposure

Accepted Answer

A) when changes in real exchange rates are exactly offset by the inflation differential. 
B) when changes in nominal exchange rates are exactly matched by the inflation differential. 
C) when changes in nominal exchange rates are exactly offset by the inflation differential. 
D) none of the above 
A) when changes in real exchange rates are exactly offset by the inflation differential. 
B) when changes in nominal exchange rates are exactly matched by the inflation differential. 
C) when changes in nominal exchange rates are exactly offset by the inflation differential. 
D) none of the above

Question 18

It is conventional to classify foreign currency exposures into the following types:

Accepted Answer

A) economic exposure, transaction exposure, and translation exposure. 
B) economic exposure, noneconomic exposure, and political exposure. 
C) national exposure, international exposure, and trade exposure. 
D) conversion exposure, and exchange exposure. 
A) economic exposure, transaction exposure, and translation exposure. 
B) economic exposure, noneconomic exposure, and political exposure. 
C) national exposure, international exposure, and trade exposure. 
D) conversion exposure, and exchange exposure.

Question 19

It can be argued that,while financial hedging can be used to stabilize a firm's cash flows,

Accepted Answer

A) it is not a substitute for long-term operational hedging. 
B) it is therefore a substitute for long-term operational hedging. 
C) it is inferior to money market hedging. 
D) none of the above. 
A) it is not a substitute for long-term operational hedging. 
B) it is therefore a substitute for long-term operational hedging. 
C) it is inferior to money market hedging. 
D) none of the above.

Question 20

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 describes the competitive effect of the depreciation?

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 translated 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 translated to a higher U.S.dollar cash flow. 
C) Both a) and b) 
D) None of the above

The "exposure" (i.e.the regression coefficient beta)is: Hint: Calculate the expression

Which of the following is false?

A U.S. firm holds an asset in Great Britain and faces the following scenario: where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset -The expected value of the investment in U.S.dollars is:

Two studies found a link between exchange rates and the stock prices of U.S.firms,

The price elasticity of demand for unique products tends to be

If the stock market of a foreign country is consistently up when the dollar value of the currency is down,

Goldman Sachs estimates that as much as __% of the pretax profits that Porsche reported for a recent fiscal year came from skillfully executing currency options.

If the domestic currency is strong or expected to become strong,

A U.S. firm holds an asset in Great Britain and faces the following scenario: where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset -The variance of the exchange rate is:

A purely domestic firm that sources and sells only domestically,

On the basis of regression Equation we can decompose the variability of the dollar value of the asset,Var(P),into two separate components.

On the basis of regression Equation we can decompose the variability of the dollar value of the asset,Var(P),into two separate components Var(P)= b² Var(S)+ Var(e) The first term in the right-hand side of the equation,b² Var(S)represents

Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.

The firm may not be subject to high degrees of operating exposure

It is conventional to classify foreign currency exposures into the following types:

It can be argued that,while financial hedging can be used to stabilize a firm's cash flows,

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 describes the competitive effect of the depreciation?

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

The "exposure" (i.e.the regression coefficient beta)is: Hint: Calculate the expression

Which of the following is false?

A U.S. firm holds an asset in Great Britain and faces the following scenario: where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset -The expected value of the investment in U.S.dollars is:

Two studies found a link between exchange rates and the stock prices of U.S.firms,

The price elasticity of demand for unique products tends to be

If the stock market of a foreign country is consistently up when the dollar value of the currency is down,

Goldman Sachs estimates that as much as __% of the pretax profits that Porsche reported for a recent fiscal year came from skillfully executing currency options.

If the domestic currency is strong or expected to become strong,

A U.S. firm holds an asset in Great Britain and faces the following scenario: where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset -The variance of the exchange rate is:

A purely domestic firm that sources and sells only domestically,

On the basis of regression Equation we can decompose the variability of the dollar value of the asset,Var(P),into two separate components.

On the basis of regression Equation we can decompose the variability of the dollar value of the asset,Var(P),into two separate components Var(P)= b2 *Var(S)+ Var(e) The first term in the right-hand side of the equation,b2 *Var(S)represents

Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.

The firm may not be subject to high degrees of operating exposure

It is conventional to classify foreign currency exposures into the following types:

It can be argued that,while financial hedging can be used to stabilize a firm's cash flows,

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 describes the competitive effect of the depreciation?

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

On the basis of regression Equation we can decompose the variability of the dollar value of the asset,Var(P),into two separate components Var(P)= b² Var(S)+ Var(e) The first term in the right-hand side of the equation,b² Var(S)represents