Question 1

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 2

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. $\begin{array}{cccc}
\text { State } & \text { Probability } &  P^{*} & S & S \times P^{*} \
1 & 1 / 3 & £ 980&\$ 1.40/£ & \$ 1,372\
2 & 1 / 3 & £ 1,000&\$ 1.50 /£ & \$ 1,500 \
3 & 1 / 3 & £ 1,070&\$ 1.60 /£  & \$ 1,712
\end{array}$ 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 3

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 4

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

Accepted Answer

A) either its cost or its price is sensitive to exchange rate changes. 
B) both the cost and the price are sensitive to exchange rate changes. 
C) both the cost and the price are insensitive to exchange rate changes. 
D) none of the options 
A) either its cost or its price is sensitive to exchange rate changes. 
B) both the cost and the price are sensitive to exchange rate changes. 
C) both the cost and the price are insensitive to exchange rate changes. 
D) none of the options

Question 5

When exchange rates change,

Accepted Answer

A) U.S.firms that produce domestically and sell only to domestic customers will be unaffected. 
B) U.S.firms that produce domestically and sell only to domestic customers can be affected if they compete against imports. 
C) U.S.firms that produce domestically and sell only to domestic customers will be affected,but only if they borrow in foreign currency to finance their domestic operations. 
D) U.S.firms that produce domestically and sell only to domestic customers will be unaffected,and U.S.firms that produce domestically and sell only to domestic customers can be affected if they compete against imports. 
A) U.S.firms that produce domestically and sell only to domestic customers will be unaffected. 
B) U.S.firms that produce domestically and sell only to domestic customers can be affected if they compete against imports. 
C) U.S.firms that produce domestically and sell only to domestic customers will be affected,but only if they borrow in foreign currency to finance their domestic operations. 
D) U.S.firms that produce domestically and sell only to domestic customers will be unaffected,and U.S.firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.

Question 6

What does it mean to have redenominated an asset in terms of the dollar?

Accepted Answer

A) You have undertaken a hedging strategy that gives the asset a constant dollar value. 
B) Multiply the foreign currency value of the asset by the spot exchange rate. 
C) You have undertaken accounting changes to eliminate translation exposure. 
D) none of the options 
A) You have undertaken a hedging strategy that gives the asset a constant dollar value. 
B) Multiply the foreign currency value of the asset by the spot exchange rate. 
C) You have undertaken accounting changes to eliminate translation exposure. 
D) none of the options

Question 7

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 options 
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 options

Question 8

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 options 
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 options

Question 9

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

Question 10

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

Question 11

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

Question 12

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 expected value of the investment in U.S.dollars is

Accepted Answer

A) $5,050 
B) $3,700 
C) $2,112.50 
D) none of the options 
A) $5,050 
B) $3,700 
C) $2,112.50 
D) none of the options

Question 13

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) The cash flow in euro could be altered due an alteration in the firm's competitive position in the marketplace,and a given operating cash flow in euro will be translated to a higher U.S.dollar cash flow. 
D) none of the options 
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) The cash flow in euro could be altered due an alteration in the firm's competitive position in the marketplace,and a given operating cash flow in euro will be translated to a higher U.S.dollar cash flow. 
D) none of the options

Question 14

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

Accepted Answer

A) asset exposure. 
B) operating exposure. 
C) asset exposure and operating exposure. 
D) none of the options 
A) asset exposure. 
B) operating exposure. 
C) asset exposure and operating exposure. 
D) none of the options

Question 15

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 "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 16

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 options 
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 options

Question 17

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 options 
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 options

Question 18

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

Accepted Answer

A) in markets with low product differentiation. 
B) in markets with high price elasticities. 
C) in markets with low product differentiation or in markets with high price elasticities. 
D) none of the options 
A) in markets with low product differentiation. 
B) in markets with high price elasticities. 
C) in markets with low product differentiation or in markets with high price elasticities. 
D) none of the options

Question 19

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

Question 20

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) A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's competitive position in the marketplace,and a given operating cash flow in pounds will be converted into a lower dollar amount after the pound depreciation. 
D) none of the options 
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) A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's competitive position in the marketplace,and a given operating cash flow in pounds will be converted into a lower dollar amount after the pound depreciation. 
D) none of the options

A flexible sourcing policy

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

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

When exchange rates change,

What does it mean to have redenominated an asset in terms of the dollar?

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

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

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.-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?

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

Managing operating exposure

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

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

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

A flexible sourcing policy

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

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

When exchange rates change,

What does it mean to have redenominated an asset in terms of the dollar?

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

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

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.-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?

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

Managing operating exposure

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

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

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