Question 1

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) both a and b 
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) both a and b

Question 2

Suppose that you implement your hedge from the last question at F1($/$\le$)= $2/$\le$.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 3

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 4

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

Question 5

With regard to operational hedging versus financial hedging,

Accepted Answer

A) operational hedging provides a more stable long-term approach than does financial hedging. 
B) financial hedging, when instituted on a rollover basis, is a superior long-term approach to operational hedging. 
C) since they both have the same goal, stabilizing the firm's cash flows in domestic currency, they are fungible in use. 
D) none of the above 
A) operational hedging provides a more stable long-term approach than does financial hedging. 
B) financial hedging, when instituted on a rollover basis, is a superior long-term approach to operational hedging. 
C) since they both have the same goal, stabilizing the firm's cash flows in domestic currency, they are fungible in use. 
D) none of the above

Question 6

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) both a and b 
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) both a and b

Question 7

The exposure coefficient $b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( S ) }$ in the regression $P = a + b \times S + e$ 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 8

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 above 
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 above

Question 9

Which of the following would be an effective hedge?

Accepted Answer

A) Sell $\le$7,500 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
B) Buy $\le$2,500 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
C) Sell $\le$25,000 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
D) None of the above 
A) Sell $\le$7,500 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
B) Buy $\le$2,500 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
C) Sell $\le$25,000 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
D) None of the above

Question 10

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($/IS), that prevails at time zero. 
D) None of the above 
A) Sell 53 Israeli shekels forward at the 1-year forward rate, F1($/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 above

Question 11

Suppose a U.S.-based MNC maintains a vacation home for employees in the British countryside and the local price of this property is always moving together with the pound price of the U.S.dollar.As a result,

Accepted Answer

A) whenever the pound depreciates against the dollar, the local currency price of this property goes up by the same proportion. 
B) the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly. 
C) both a and b 
D) none of the above 
A) whenever the pound depreciates against the dollar, the local currency price of this property goes up by the same proportion. 
B) the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly. 
C) both a and b 
D) none of the above

Question 12

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 13

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. $$\begin{array} { | c c l l l | } 
\hline \text { State } & \text { Probability } & P ^ { * } & S & S \times P ^ { * } \
\hline \mathbf { 1 } & 1 / 3 & £ 1,000 & \$ 1.40 / £ & \$ 1,400 \
\hline \mathbf { 2 } & 1 / 3 & £ 933 & \$ 1.50 / £ & \$ 1,400 \
\hline \mathbf { 3 } & 1 / 3 & £ 875 & \$ 1.60 / £ & \$ 1,400 \
\hline
\end{array}$$ 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 14

In the figure at right,label curves A and B respectively,

Accepted Answer

A) unhedged, hedged. 
B) hedged, unhedged. 
C) normal, abnormal. 
D) none of the above 
A) unhedged, hedged. 
B) hedged, unhedged. 
C) normal, abnormal. 
D) none of the above

Question 15

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 16

In recent years,

Accepted Answer

A) the U.S.dollar has appreciated substantially against most major currencies of the world, especially against the euro. 
B) the U.S.dollar has depreciated substantially against most major currencies of the world, especially against the euro. 
C) the U.S.dollar has maintained its value against most major currencies of the world, especially against the euro. 
A) the U.S.dollar has appreciated substantially against most major currencies of the world, especially against the euro. 
B) the U.S.dollar has depreciated substantially against most major currencies of the world, especially against the euro. 
C) the U.S.dollar has maintained its value against most major currencies of the world, especially against the euro.

Question 17

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

Question 18

Which of the following is a true statement?

Accepted Answer

A) As long as exchange rates do not always move in the same direction, the firm can stabilize its operating cash flows by diversifying its export market. 
B) The firm should not get into new lines of business solely to diversify exchange risk because conglomerate expansion can bring about inefficiency and losses. 
C) All of the above are true 
D) None of the above are true 
A) As long as exchange rates do not always move in the same direction, the firm can stabilize its operating cash flows by diversifying its export market. 
B) The firm should not get into new lines of business solely to diversify exchange risk because conglomerate expansion can bring about inefficiency and losses. 
C) All of the above are true 
D) None of the above are true

Question 19

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) Undertaken accounting changes to eliminate translation exposure. 
D) None of the above 
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) Undertaken accounting changes to eliminate translation exposure. 
D) None of the above

Question 20

The extent to which the firm's operating cash flows would be affected by random changes in exchange rates is called

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

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

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

What is the objective of managing operating exposure?

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

With regard to operational hedging versus financial hedging,

When exchange rates change,

The exposure coefficient $b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( S ) }$ in the regression $P = a + b \times S + e$ is:

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

Which of the following would be an effective hedge?

Which of the following would be an effective hedge?

Suppose a U.S.-based MNC maintains a vacation home for employees in the British countryside and the local price of this property is always moving together with the pound price of the U.S.dollar.As a result,

When exchange rates change,

In the figure at right,label curves A and B respectively,

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

In recent years,

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

Which of the following is a true statement?

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

The extent to which the firm's operating cash flows would be affected by random changes in exchange rates is called

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

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

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

What is the objective of managing operating exposure?

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

With regard to operational hedging versus financial hedging,

When exchange rates change,

The exposure coefficient b=Cov⁡(P,S)Var⁡(S)b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( S ) }b=Var(S)Cov(P,S)​ in the regression P=a+b×S+eP = a + b \times S + eP=a+b×S+e is:

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

Which of the following would be an effective hedge?

Which of the following would be an effective hedge?

Suppose a U.S.-based MNC maintains a vacation home for employees in the British countryside and the local price of this property is always moving together with the pound price of the U.S.dollar.As a result,

When exchange rates change,

In the figure at right,label curves A and B respectively,

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

In recent years,

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

Which of the following is a true statement?

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

The extent to which the firm's operating cash flows would be affected by random changes in exchange rates is called

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

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

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

The exposure coefficient $b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( S ) }$ in the regression $P = a + b \times S + e$ is: