Question 1

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 options. 
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 options.

Question 2

When the Mexican peso collapsed in 1994,declining by 37 percent,

Accepted Answer

A) U.S.firms that exported to Mexico and priced in peso were adversely affected. 
B) U.S.firms that exported to Mexico and priced in dollars were adversely affected. 
C) U.S.firms were unaffected by the peso collapse,since Mexico is such a small market. 
D) U.S.firms that exported to Mexico and priced in peso were adversely affected,and U.S.firms that exported to Mexico and priced in dollars were adversely affected. 
A) U.S.firms that exported to Mexico and priced in peso were adversely affected. 
B) U.S.firms that exported to Mexico and priced in dollars were adversely affected. 
C) U.S.firms were unaffected by the peso collapse,since Mexico is such a small market. 
D) U.S.firms that exported to Mexico and priced in peso were adversely affected,and U.S.firms that exported to Mexico and priced in dollars were adversely affected.

Question 3

A U.S.firm holds an asset in Great Britain and faces the following scenario: $\begin{array}{llccc}
&\text { State 1}&\text { State 2}&\text { State 3}\
\text { Probability } & 25 \% & 50 \% & {25 \%} \
\text { Spot rate } & \$ 2.50 /£ & \$ 2.00 / £ & \$1.60 / £\
P^{*} & £ 1.800 & £ 2.250 & £ 2.812 .50
\end{array}$ Where
P* = Pound sterling 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 pound denominated cash flow at F1($/£)= $2/£.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 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

Question 4

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 truest?

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 options. 
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 options.

Question 5

Investment in R&D activities can allow the firm to maintain and strengthen its competitive position in the face of adverse exchange rate movements.The mechanism for this includes

Accepted Answer

A) successful R&D efforts allowing the firm to cut costs and enhance productivity. 
B) R&D efforts leading to the introduction of new and unique products for which competitors offer no close substitutes-since the demand for unique products tends to be highly inelastic the firm would be less exposed to exchange risk. 
C) successful R&D efforts creating a perception among consumers that its product is indeed different from those offered by competitors.Once the firm's product acquires a unique identity,its demand is less likely to be price-sensitive. 
D) all of the options 
A) successful R&D efforts allowing the firm to cut costs and enhance productivity. 
B) R&D efforts leading to the introduction of new and unique products for which competitors offer no close substitutes-since the demand for unique products tends to be highly inelastic the firm would be less exposed to exchange risk. 
C) successful R&D efforts creating a perception among consumers that its product is indeed different from those offered by competitors.Once the firm's product acquires a unique identity,its demand is less likely to be price-sensitive. 
D) all of the options

Question 6

The exposure coefficient b = $\frac { \operatorname { Cov } ( P , S ) } { \operatorname { VAR } ( S ) }$ in the regression P = a + b × S + e 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 7

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
The "exposure" (i.e.the regression coefficient beta)is
Hint: Calculate the expression $\frac { \operatorname { Cov } ( P , S ) } { \operatorname { VAR } ( S ) }$ .

Accepted Answer

A) 7,500 
B) 2,500 
C) −2,500 
D) none of the options 
A) 7,500 
B) 2,500 
C) −2,500 
D) none of the options

Question 8

The price elasticity of demand for commodity products tends to be

Accepted Answer

A) highly elastic. 
B) highly inelastic. 
C) highly elastic and highly inelastic. 
D) none of the options 
A) highly elastic. 
B) highly inelastic. 
C) highly elastic and highly inelastic. 
D) none of the options

Question 9

What is the objective of managing operating exposure?

Accepted Answer

A) Stabilize accounting results 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) none of the options 
A) Stabilize accounting results 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) none of the options

Question 10

The firm may not be able to pass through changes in the exchange rate

Accepted Answer

A) in markets with mainly domestic (foreign to the firm)competitors. 
B) in markets with low price elasticities. 
C) in markets with mainly domestic (foreign to the firm)competitors or in markets with low price elasticities. 
D) none of the options 
A) in markets with mainly domestic (foreign to the firm)competitors. 
B) in markets with low price elasticities. 
C) in markets with mainly domestic (foreign to the firm)competitors or in markets with low price elasticities. 
D) none of the options

Question 11

Investments in R&D

Accepted Answer

A) are usually a waste of time and money. 
B) can allow the firm to maintain and strengthen its competitive position. 
C) can allow the firm to cut costs and enhance productivity. 
D) can allow the firm to maintain and strengthen its competitive position,as well as cut costs and enhance productivity. 
A) are usually a waste of time and money. 
B) can allow the firm to maintain and strengthen its competitive position. 
C) can allow the firm to cut costs and enhance productivity. 
D) can allow the firm to maintain and strengthen its competitive position,as well as cut costs and enhance productivity.

Question 12

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
Which of the following would be an effective hedge?

Accepted Answer

A) Sell 53 Israeli shekels forward at the 1-year forward rate,F1($/IS),that prevails at time zero. 
B) Buy 53 Israeli shekels forward at the 1-year forward rate,F1($/IS),that prevails at time zero. 
C) Sell 12,898 Israeli shekels forward at the 1-year forward rate,F1($/IS),that prevails at time zero. 
D) none of the options 
A) Sell 53 Israeli shekels forward at the 1-year forward rate,F1($/IS),that prevails at time zero. 
B) Buy 53 Israeli shekels forward at the 1-year forward rate,F1($/IS),that prevails at time zero. 
C) Sell 12,898 Israeli shekels forward at the 1-year forward rate,F1($/IS),that prevails at time zero. 
D) none of the options

Question 13

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) Selecting low-cost production sites,diversifying the market,as well as pursuing a flexible sourcing policy,product differentiation,R&D efforts. 
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) Selecting low-cost production sites,diversifying the market,as well as pursuing a flexible sourcing policy,product differentiation,R&D efforts.

Question 14

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
The variance of the exchange rate is

Accepted Answer

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

Question 15

Suppose that you hold a piece of land in the city of London that you may want to sell in one year.As a U.S.resident,you are concerned with the dollar value of the land.Assume that if the British economy booms in the future,the land will be worth £2,000,and one British pound will be worth $1.80.If the British economy slows down,on the other hand,the land will be worth less,say,£1,500,but the pound will be stronger,say,$2.20/£.You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.
Estimate your exposure (b)to the exchange risk.

Accepted Answer

b = @#LAT-DLM& . E[P] = 0.60 × £2,000 × $1.80 + 0.

Question 16

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 options 
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 options

Question 17

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 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 18

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 19

Suppose that you hold a piece of land in the city of London that you may want to sell in one year.As a U.S.resident,you are concerned with the dollar value of the land.Assume that if the British economy booms in the future,the land will be worth £2,000,and one British pound will be worth $1.80.If the British economy slows down,on the other hand,the land will be worth less,say,£1,500,but the pound will be stronger,say,$2.20/£.You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.
Discuss how you can hedge your exchange risk exposure and also examine the consequences of hedging.

Accepted Answer

You could sell b = £539.17 forward.Howev

Question 20

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 options 
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 options

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

When the Mexican peso collapsed in 1994,declining by 37 percent,

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 truest?

Investment in R&D activities can allow the firm to maintain and strengthen its competitive position in the face of adverse exchange rate movements.The mechanism for this includes

The exposure coefficient b = $\frac { \operatorname { Cov } ( P , S ) } { \operatorname { VAR } ( S ) }$ in the regression P = a + b × S + e informs

The price elasticity of demand for commodity products tends to be

What is the objective of managing operating exposure?

The firm may not be able to pass through changes in the exchange rate

Investments in R&D

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

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

Economic exposure refers to

Which of the following is false?

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

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

When the Mexican peso collapsed in 1994,declining by 37 percent,

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 truest?

Investment in R&D activities can allow the firm to maintain and strengthen its competitive position in the face of adverse exchange rate movements.The mechanism for this includes

The exposure coefficient b = Cov⁡(P,S)VAR⁡(S)\frac { \operatorname { Cov } ( P , S ) } { \operatorname { VAR } ( S ) }VAR(S)Cov(P,S)​ in the regression P = a + b × S + e informs

The price elasticity of demand for commodity products tends to be

What is the objective of managing operating exposure?

The firm may not be able to pass through changes in the exchange rate

Investments in R&D

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

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

Economic exposure refers to

Which of the following is false?

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

The exposure coefficient b = $\frac { \operatorname { Cov } ( P , S ) } { \operatorname { VAR } ( S ) }$ in the regression P = a + b × S + e informs