Question 1

Which of the following can a company use to manage operating exposure?

Accepted Answer

A) Selecting low-cost production sites, diversifying the market. 
B) Low cost production sites, but not financial hedging. 
C) Pursuing a flexible sourcing policy, product differentiation, R& D efforts. 
D) Both a) and c). 
A) Selecting low-cost production sites, diversifying the market. 
B) Low cost production sites, but not financial hedging. 
C) Pursuing a flexible sourcing policy, product differentiation, R& D efforts. 
D) Both a) and c).

Question 2

Managing operating exposure

Accepted Answer

A) is a short-term tactical issue. 
B) is a long-term issue, like selecting a site for a factory. 
C) is relatively unimportant, since most MNCs have a built-in hedge. 
D) none of the above 
A) is a short-term tactical issue. 
B) is a long-term issue, like selecting a site for a factory. 
C) is relatively unimportant, since most MNCs have a built-in hedge. 
D) none of the above

Question 3

The link between the home currency value of a firm's assets and liabilities 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 4

Economic exposure refers to

Accepted Answer

A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. 
B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate. 
C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates. 
D) ex post and ex ante currency exposures. 
A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. 
B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate. 
C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates. 
D) ex post and ex ante currency exposures.

Question 5

A U.S.firm holds an asset in Italy and faces the following scenario:   Where P* = Euro price of the asset held by the U.S.firm
The CFO decides to hedge his exposure by selling forward the expected value of the euro denominated cash flow at F1($/£)= $1.50/€.As a result

Accepted Answer

A) the firm's exposure to the exchange rate is made worse. 
B) he has a nearly perfect hedge. 
C) he has a perfect hedge. 
D) none of the above 
A) the firm's exposure to the exchange rate is made worse. 
B) he has a nearly perfect hedge. 
C) he has a perfect hedge. 
D) none of the above

Question 6

The exposure coefficient   in the regression   is:

Accepted Answer

A) A measure of how a change in the exchange rate affects the dollar value of a firm's assets. 
B) Has a value of zero if the value of the firm's assets is perfectly correlated with changes in the exchange rate. 
C) both a) and b) 
D) none of the above 
A) A measure of how a change in the exchange rate affects the dollar value of a firm's assets. 
B) Has a value of zero if the value of the firm's assets is perfectly correlated with changes in the exchange rate. 
C) both a) and b) 
D) none of the above

Question 7

When exchange rates change,

Accepted Answer

A) this can alter the operating cash flow of a domestic firm. 
B) this can alter the competitive position of a domestic firm. 
C) this can alter the home currency values of a multinational firm's assets and liabilities. 
D) all of the above 
A) this can alter the operating cash flow of a domestic firm. 
B) this can alter the competitive position of a domestic firm. 
C) this can alter the home currency values of a multinational firm's assets and liabilities. 
D) all of the above

Question 8

Exposure to currency risk can be measured by the sensitivities of

Accepted Answer

A) the future home currency values of the firm's assets and liabilities. 
B) the firm's operating cash flows to random changes in exchange rates. 
C) both a) and b) 
D) none of the above 
A) the future home currency values of the firm's assets and liabilities. 
B) the firm's operating cash flows to random changes in exchange rates. 
C) both a) and b) 
D) none of the above

Question 9

Suppose that you implement your hedge from the last question at F1($/£)= $2/£.Your cash flows in state 1,2,and 3 respectively will be

Accepted Answer

A) $5,100, $5,000, $5,100. 
B) $5,100, $5,100, $5,100. 
C) $5,000, $5,000, $5,000. 
D) none of the above 
A) $5,100, $5,000, $5,100. 
B) $5,100, $5,100, $5,100. 
C) $5,000, $5,000, $5,000. 
D) none of the above

Question 10

Consider a U.S.-based MNC with a wholly-owned European subsidiary selling a product sourced in euro and priced in euro with inelastic demand.Following a depreciation of the dollar against the euro,which of the following is the most true?

Accepted Answer

A) Since they have inelastic demand, the U.S.firm can just pass through the impact of the exchange rate change. 
B) Since they have elastic demand, the U.S.firm cannot just pass through the impact of the exchange rate change. 
C) Since the exchange rate movement was favorable to the U.S.firm, there is no impact on the firm's position. 
D) None of the above. 
A) Since they have inelastic demand, the U.S.firm can just pass through the impact of the exchange rate change. 
B) Since they have elastic demand, the U.S.firm cannot just pass through the impact of the exchange rate change. 
C) Since the exchange rate movement was favorable to the U.S.firm, there is no impact on the firm's position. 
D) None of the above.

Question 11

What is the objective of managing operating exposure?

Accepted Answer

A) Stabilize cash flows in the face of fluctuating exchange rates. 
B) Selecting low cost production sites. 
C) Increase the variability of cash flows in the face of fluctuating exchange rates. 
D) Both a) and c) 
A) Stabilize cash flows in the face of fluctuating exchange rates. 
B) Selecting low cost production sites. 
C) Increase the variability of cash flows in the face of fluctuating exchange rates. 
D) Both a) and c)

Question 12

A U.S. firm holds an asset in Israel and faces the following scenario:   where,
P* = Israeli shekel (IS) 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) $2,083.33 
B) $762.50 
C) $6,250.00 
D) $6,562.50 
A) $2,083.33 
B) $762.50 
C) $6,250.00 
D) $6,562.50

Question 13

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 236,717 ($)2 and 493,751 ($)2 respectively. 
B) Most of the volatility of the dollar value of the British asset can not be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. 
C) Most of the volatility of the dollar value of the British asset can NOT 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 236,717 ($)2 and 493,751 ($)2 respectively. 
B) Most of the volatility of the dollar value of the British asset can not be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 236,717 ($)2 and 493,751 ($)2 respectively. 
C) Most of the volatility of the dollar value of the British asset can NOT 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 14

Which of the following would be an effective hedge?

Accepted Answer

A) Sell £2,500 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($/£), that prevails at time zero. 
D) None of the above 
A) Sell £2,500 forward at the 1-year forward rate, F1($/£), 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 15

A firm's operating exposure is

Accepted Answer

A) defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates. 
B) determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products. 
C) determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing. 
D) all of the above 
A) defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates. 
B) determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products. 
C) determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing. 
D) all of the above

Question 16

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) 0.10 
C) 0.002 
D) none of the above 
A) 0.0200 
B) 0.10 
C) 0.002 
D) none of the above

Question 17

A U.S. firm holds an asset in Israel and faces the following scenario:   where,
P* = Israeli shekel (IS) 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) 0.001968 
B) 0.002969 
C) 0.003968 
D) 0.004968 
A) 0.001968 
B) 0.002969 
C) 0.003968 
D) 0.004968

Question 18

A flexible sourcing policy

Accepted Answer

A) is primarily concerned with low-cost (and often low-quality) vendors. 
B) need not be confined just to materials and parts. 
C) only works for manufacturing firms, not service firms. 
D) puts the focus on the exchange rate at the expense of shipping rates. 
A) is primarily concerned with low-cost (and often low-quality) vendors. 
B) need not be confined just to materials and parts. 
C) only works for manufacturing firms, not service firms. 
D) puts the focus on the exchange rate at the expense of shipping rates.

Question 19

Operating exposure measures

Accepted Answer

A) the extent to which the foreign currency value of the firm's assets is affected by unanticipated changes in exchange rates. 
B) the extent to which the firm's operating cash flows will be affected by unexpected changes in exchange rates. 
C) the affect of changes in exchange rates will have on the consolidated financial reports of a MNC. 
D) the affect of unanticipated changes in exchange rates on the dollar value of contractual obligations denominated in a foreign currency. 
A) the extent to which the foreign currency value of the firm's assets is affected by unanticipated changes in exchange rates. 
B) the extent to which the firm's operating cash flows will be affected by unexpected changes in exchange rates. 
C) the affect of changes in exchange rates will have on the consolidated financial reports of a MNC. 
D) the affect of unanticipated changes in exchange rates on the dollar value of contractual obligations denominated in a foreign currency.

Question 20

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

Accepted Answer

A) this could erode the competitive position of the firm's exports. 
B) this could erode the competitive position of the firm's import competition. 
C) the firm should consider locating production facilities in a foreign country where costs are low. 
D) both a) and c) 
A) this could erode the competitive position of the firm's exports. 
B) this could erode the competitive position of the firm's import competition. 
C) the firm should consider locating production facilities in a foreign country where costs are low. 
D) both a) and c)

Exam 9: Management of Economic Exposure

Which of the following can a company use to manage operating exposure?

Managing operating exposure

The link between the home currency value of a firm's assets and liabilities and exchange rate fluctuations is

Economic exposure refers to

A U.S.firm holds an asset in Italy and faces the following scenario: Where P* = Euro price of the asset held by the U.S.firm The CFO decides to hedge his exposure by selling forward the expected value of the euro denominated cash flow at F1($/£)= $1.50/€.As a result

The exposure coefficient in the regression is:

When exchange rates change,

Exposure to currency risk can be measured by the sensitivities of

Suppose that you implement your hedge from the last question at F1($/£)= $2/£.Your cash flows in state 1,2,and 3 respectively will be

Consider a U.S.-based MNC with a wholly-owned European subsidiary selling a product sourced in euro and priced in euro with inelastic demand.Following a depreciation of the dollar against the euro,which of the following is the most true?

What is the objective of managing operating exposure?

A U.S. firm holds an asset in Israel and faces the following scenario: where, P* = Israeli shekel (IS) 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:

Which of the following conclusions are correct?

Which of the following would be an effective hedge?

A firm's operating exposure is

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 U.S. firm holds an asset in Israel and faces the following scenario: where, P* = Israeli shekel (IS) 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 flexible sourcing policy

Operating exposure measures

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

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

A U.S.firm holds an asset in Italy and faces the following scenario: Where P* = Euro price of the asset held by the U.S.firm The CFO decides to hedge his exposure by selling forward the expected value of the euro denominated cash flow at F₁($/£)= $1.50/€.As a result

Suppose that you implement your hedge from the last question at F₁($/£)= $2/£.Your cash flows in state 1,2,and 3 respectively will be