A U.S.firm holds an asset in Great Britain and faces the following scenario: $\begin{array}{l} \begin{array} { l } &\text { State 1}\\ \text { Probability } & 25 \% \\ \text { Spotrate } & \$ 2.20 / £ \\ P^{*} & £ 3,000 \\ P & \$ 6,600 \end{array} \begin{array} { l } \text { State 2}&\text { State 3}\\ 50 \% & 25 \% \\ \$ 2.00/£ & \$ 1.80 / £ \\ £ 2,500 & £ 2,000 \\ \$ 5,000 & \$ 3,600 \end{array} \end{array}$ where, P* = Pound sterling price of the asset held by the U.S.firm P = Dollar price of the same asset Which of the following would be an effective hedge?

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($/£),that prevails at time zero. D) none of the options A) Sell £7,500 forward at the 1-year forward rate,F1($/£),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 options A

A U.S.firm holds an asset in Italy and faces the following scenario: $\begin{array}{llccc} &\text { State 1}&\text { State 2}&\text { State 3}\\ \text { Probability } &30 \% & 400 \% & {30 \%} \\ \text { Spot rate } & \$ 2.50 /£ & \$ 1.50 / £ & \$0.90\\ P^{*} & € 1350.00 & € 2.250.00 & € 3750.00 \end{array}$ 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,

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 options 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 options A

A U.S.firm holds an asset in Great Britain and faces the following scenario: $\begin{array}{l} \begin{array} { l } &\text { State 1}\\ \text { Probability } & 25 \% \\ \text { Spotrate } & \$ 2.20 / £ \\ P^{*} & £ 1,800 \\ P & \$ 4,500 \end{array} \begin{array} { l } \text { State 2}&\text { State 3}\\ 50 \% & 25 \% \\ \$ 2.00/£ & \$ 1.60 / £ \\ £ 2,250 & £ 2,812.50 \\ \$ 4,500 & \$ 4,500 \end{array} \end{array}$ where, P* = Pound sterling price of the asset held by the U.S.firm P = Dollar price of the same asset Which of the following conclusions are correct?

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.

A U.S.firm holds an asset in Great Britain and faces the following scenario: $\begin{array}{l} \begin{array} { l } &\text { State 1}\\ \text { Probability } & 25 \% \\ \text { Spotrate } & \$ 2.20 / £ \\ P^{*} & £ 2,000 \\ P & \$ 4,400 \end{array} \begin{array} { l } \text { State 2}&\text { State 3}\\ 50 \% & 25 \% \\ \$ 2.00/£ & \$ 1.80 / £\\ £ 2,500 & £ 3,000 \\ \$ 5,000 & \$ 5,400 \end{array} \end{array}$ 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) 0.0200 B) 0.10 C) 0.002 D) none of the options A) 0.0200 B) 0.10 C) 0.002 D) none of the options

A U.S.firm holds an asset in Israel and faces the following scenario: $\begin{array}{l} \begin{array} { l } &\text { State 1}\\ \text { Probability } & 25 \% \\ \text { Spotrate } & \$ 0.30 / LS \\ P^{*} & LS 2,000 \\ P & \$ 600 \end{array} \begin{array} { l } \text { State 2}&\text { State 3}\\ 50 \% & 25 \% \\ \$ 0.20/LS & \$ 0.15 / LS \\ £ 5,000 & £ 3,000 \\ \$ 1,000 & \$ 4,50 \end{array} \end{array}$ where, P* = Israeli shekel (IS)price of the asset held by the U.S.firm P = Dollar price of the same asset The "exposure" (i.e.,the regression coefficient beta)is Hint: Calculate the expression $\frac { \operatorname { Cov } ( P , S ) } { \operatorname { VAR } ( S ) }$ .

A) −52.6316 B) 1,289.80 C) 12,898.00 D) none of the options A) −52.6316 B) 1,289.80 C) 12,898.00 D) none of the options

Exam 9: Management of Economic Exposure

A U.S.firm holds an asset in Great Britain and faces the following scenario: State 1 Probability 25\% Spotrate \ 2.20/£ £3,000 P \ 6,600 State 2 State 3 50\% 25\% \ 2.00/£ \ 1.80/£ £2,500 £2,000 \ 5,000 \ 3,600 where, P^* = Pound sterling price of the asset held by the U.S.firm P = Dollar price of the same asset Which of the following would be an effective hedge?

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(Multiple Choice)

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Question 1

Correct Answer:

Verified

A

Consider a U.S.-based MNC with a wholly-owned German subsidiary.Following a depreciation of the dollar against the euro,which of the following describes the conversion effect of the depreciation?

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(Multiple Choice)

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Question 2

Correct Answer:

Verified

B

A U.S.firm holds an asset in Italy and faces the following scenario: State 1 State 2 State 3 Probability 30\% 400\% 30\% Spot rate \ 2.50/£ \ 1.50/£ \0 .90 1350.00 2.250.00 3750.00 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,

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Question 3

Correct Answer:

Verified

A

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

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Question 4

The price elasticity of demand for unique products tends to be

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Question 5

A U.S.firm holds an asset in Great Britain and faces the following scenario: State 1 Probability 25\% Spotrate \ 2.20/£ £1,800 P \ 4,500 State 2 State 3 50\% 25\% \ 2.00/£ \ 1.60/£ £2,250 £2,812.50 \ 4,500 \ 4,500 where, P^* = Pound sterling price of the asset held by the U.S.firm P = Dollar price of the same asset Which of the following conclusions are correct?

(Multiple Choice)

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Question 6

A foreign country could provide low cost production sites

(Multiple Choice)

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Question 7

Which of the following are identified by your text as a strategy for managing operating exposure? (i)Selecting low-cost production sites (ii)Flexible sourcing policy (iii)Diversification of the market (iv)Product differentiation and R&D efforts (v)Financial Hedging

(Multiple Choice)

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Question 8

A purely domestic firm that sources and sells only domestically,

(Multiple Choice)

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Question 9

On the basis of regression equation P = a + b × S + e,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

(Multiple Choice)

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Question 10

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

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Question 11

A U.S.firm holds an asset in Great Britain and faces the following scenario: State 1 Probability 25\% Spotrate \ 2.20/£ £2,000 P \ 4,400 State 2 State 3 50\% 25\% \ 2.00/£ \ 1.80/£ £2,500 £3,000 \ 5,000 \ 5,400 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:

(Multiple Choice)

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Question 12

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

(Multiple Choice)

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Question 13

A U.S.firm holds an asset in Israel and faces the following scenario: State 1 Probability 25\% Spotrate \ 0.30/LS LS2,000 P \ 600 State 2 State 3 50\% 25\% \ 0.20/LS \ 0.15/LS £5,000 £3,000 \ 1,000 \ 4,50 where, P^* = Israeli shekel (IS)price of the asset held by the U.S.firm P = Dollar price of the same asset The "exposure" (i.e.,the regression coefficient beta)is Hint: Calculate the expression $\frac { \operatorname { Cov } ( P , S ) } { \operatorname { VAR } ( S ) }$ .

(Multiple Choice)

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Question 14

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. State Probability S S\times 1 1/3 £1,000 \ 1.40/£ \ 1,400 2 1/3 £1,000 \ 1.50/£ \ 1,500 3 1/3 £1,000 \ 1.60/£ \ 1,600 Which of the following statements is most correct?

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Question 15

What is the objective of managing operating exposure?

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Question 16

When exchange rates change,

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Question 17

Consider a U.S.-based MNC with a wholly-owned French subsidiary.Following a depreciation of the dollar against the euro,which of the following best describes the mechanism of any effect of the depreciation?

(Multiple Choice)

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Question 18

Find an effective hedge financial hedge if a U.S.firm holds an asset in Great Britain and faces the following scenario: State 1 Probability 25\% Spotrate \ 2.20/£ £3,000 P \ 6,600 State 2 State 3 50\% 25\% \ 2.00/£ \ 1.80/£ £2,250 £2,000 \ 5,000 \ 3,600 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 P = a + b × S + e The regression coefficient beta is calculated as b = $\frac { \operatorname { Cov } ( P , S ) } { \operatorname { VAR } ( S ) }$ Where Cov(P,S)= 0.25 × ($6,600 - $5,050)× ($2.20 - $2.00)+ 0.50 × ($5,000 - $5,050)× ($2.00 - $2.00)+ 0.25 × ($3,600 - $5,050)× ($1.80 - $2.00)Cov(P,S)= 77.50 + 0 + 72.50 Cov(P,S)= 150 B = $\frac { 150 } { 0.02 }$ = 7,500 The variance of the exchange rate is calculated as E(S)= 0.25 × $2.20 + 0.50 × $2.00 + 0.25 × $1.80 = $.55 + $1 + $.45 = $2.00 VAR(S)= 0.25 $( \$ 2.20 - \$ 2.00 ) ^ { 2 }$ + 0.50 $( \$ 2.00 - \$ 2.00 ) ^ { 2 }$ + 0.25 $( \$ 1.80 - \$ 2.00 ) ^ { 2 }$ = 0.01 + 0 + 0.01 = 0.02 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 = $5,050 Suppose that you implement your hedge at F₁($/£)= $2/£.Your cash flows in state 1,2,and 3 respectively will be

(Multiple Choice)

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Question 19

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

(Multiple Choice)

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Question 20

Consider a U.S.-based MNC with a wholly-owned German subsidiary.Following a depreciation of the dollar against the euro,which of the following describes the conversion effect of the depreciation?

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

The price elasticity of demand for unique products tends to be

A foreign country could provide low cost production sites

Which of the following are identified by your text as a strategy for managing operating exposure? (i)Selecting low-cost production sites (ii)Flexible sourcing policy (iii)Diversification of the market (iv)Product differentiation and R&D efforts (v)Financial Hedging

A purely domestic firm that sources and sells only domestically,

On the basis of regression equation P = a + b × S + e,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

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

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

What is the objective of managing operating exposure?

When exchange rates change,

Consider a U.S.-based MNC with a wholly-owned French subsidiary.Following a depreciation of the dollar against the euro,which of the following best describes the mechanism of any effect of the depreciation?

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

International Monetary System

Globalization and the Multinational Firm

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

Consider a U.S.-based MNC with a wholly-owned German subsidiary.Following a depreciation of the dollar against the euro,which of the following describes the conversion effect of the depreciation?

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

The price elasticity of demand for unique products tends to be

A foreign country could provide low cost production sites

Which of the following are identified by your text as a strategy for managing operating exposure? (i)Selecting low-cost production sites (ii)Flexible sourcing policy (iii)Diversification of the market (iv)Product differentiation and R&D efforts (v)Financial Hedging

A purely domestic firm that sources and sells only domestically,

On the basis of regression equation P = a + b × S + e,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

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

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

What is the objective of managing operating exposure?

When exchange rates change,

Consider a U.S.-based MNC with a wholly-owned French subsidiary.Following a depreciation of the dollar against the euro,which of the following best describes the mechanism of any effect of the depreciation?

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

International Monetary System

Globalization and the Multinational Firm

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 P = a + b × S + e,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