Question 1

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 2

In recent years,the U.S.dollar has depreciated substantially against most major currencies of the world,especially against the euro.

Accepted Answer

A) The stronger euro has made many European products more expensive in dollar terms, hurting sales of these products in the United States. 
B) The stronger euro has made many American products less expensive in euro terms, boosting sales of U.S.products in Europe. 
C) Both a and b 
D) None of the above 
A) The stronger euro has made many European products more expensive in dollar terms, hurting sales of these products in the United States. 
B) The stronger euro has made many American products less expensive in euro terms, boosting sales of U.S.products in Europe. 
C) Both a and b 
D) None of the above

Question 3

S.firm holds an asset in Great Britain and faces the following scenario: $$\begin{array} { l c c c } 
& \text { State } 1 & \text { State } 2 & \text { State } 3 \
\text { Probability } & 25 \% & 50 \% & 25 \% \
\hline \text { Spot rate } & \$ 2.20 / £ & \$ 2.00 / £ & \$ 1.80 / € \
P ^ { * } & £ 3,000 & £ 2,500 & £ 2,000 \
P & \$ 6,600 & \$ 5,000 & \$ 3,600 \
\hline
\end{array}$$ 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 $P = a + b \times S + e$ .
The regression coefficient beta is calculated as b = $$\operatorname { Cov } ( P , S )$$
$\operatorname { Var } ( S )$ Where $$\begin{aligned}
\operatorname { Cov } ( P , S ) = & 0.25 \times ( \$ 6,600 - \$ 5,050 ) \times ( \$ 2.20 - \$ 2.00 ) \
+ 0.50 \times ( \$ 5,000 - \$ 5,050 ) \times ( \$ 2.00 - \$ 2.00 ) & + 0.25 \times ( \$ 3,600 - \$ 5,050 ) \times ( \$ 1.80 - \$ 2.00 ) \
\operatorname { Cov } ( P , S ) = & 77.50 + 0 + 72.50 \
\operatorname { Cov } ( P , S ) = & 150 \
b = \frac { 150 } { 0.02 } = 7,500
\end{aligned}$$ The variance of the exchange rate is calculated as: $$\begin{array} { l } 
\mathrm { E } ( S ) = 0.25 \times \$ 2.20 + 0.50 \times \$ 2.00 + 0.25 \times \$ 1.80 = \$ .55 + \$ 1 + \$ .45 = \$ 2.00 \
\operatorname { VAR } ( S ) = 0.25 ( \$ 2.20 - \$ 2.00 ) ^ { 2 } + 0.50 ( \$ 2.00 - \$ 2.00 ) ^ { 2 } + 0.25 ( \$ 1.80 - \$ 2.00 ) ^ { 2 } = 0.01 + 0 + 0.01 \
= 0.02
\end{array}$$ 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
Which of the following is the most effective hedge financial 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$7,500 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
C) Sell $\le$2,500 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
D) 0.25 $\times$ $\le$3,000 + 0.50 $\times$ $\le$2,500 + 0.25 $\times$ $\le$ = $\le$2,500 
A) Sell $\le$7,500 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
B) Buy $\le$7,500 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
C) Sell $\le$2,500 forward at the 1-year forward rate, F1($/$\le$), that prevails at time zero. 
D) 0.25 $\times$ $\le$3,000 + 0.50 $\times$ $\le$2,500 + 0.25 $\times$ $\le$ = $\le$2,500

Question 4

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

Accepted Answer

A) $4,950. 
B) $3,700. 
C) $2,112.50. 
D) none of the above 
A) $4,950. 
B) $3,700. 
C) $2,112.50. 
D) none of the above

Question 5

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 above 
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 above

Question 6

From the perspective of the U.S.firm that owns an asset in Britain,the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S using the regression equation $P = a + b \times S + e$ is

Accepted Answer

A) asset exposure. 
B) operating exposure. 
C) accounting exposure. 
D) none of the above 
A) asset exposure. 
B) operating exposure. 
C) accounting exposure. 
D) none of the above

Question 7

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

Accepted Answer

A) -52.6316 
B) 1,289.80 
C) 12,898.00 
D) none of the above 
A) -52.6316 
B) 1,289.80 
C) 12,898.00 
D) none of the above

Question 8

Suppose a U.S.firm has an asset in Italy 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 asset (P*)as well as the future exchange rate (S)will be determined,depending on the realized state of the world. $$\begin{array} { | c c l l l | } 
\hline \text { State } & \text { Probability } & P ^ { * } & S & S \times P ^ { * } \
\hline \mathbf { 1 } & 1 / 3 & € 1,000 & \$ 1.40 / € & \$ 1,400 \
\hline \mathbf { 2 } & 1 / 3 & € 933 & \$ 1.50 / € & \$ 1,400 \
\hline \mathbf { 3 } & 1 / 3 & € 875 & \$ 1.60 / € & \$ 1,400 \
\hline
\end{array}$$ Assume that you choose to "hedge" this asset by selling forward the expected value of the euro denominated cash flow at F1($/$\le$)= $1.50/€.Calculate your cash flows in each of the possible states.

Accepted Answer

A) $1,400, $1,400, $1,400, 
B) $1,496.6, $1,400, $1,306.40 
C) $1,404, $1,404.$1,404. 
D) None of the above 
A) $1,400, $1,400, $1,400, 
B) $1,496.6, $1,400, $1,306.40 
C) $1,404, $1,404.$1,404. 
D) None of the above

Question 9

The price elasticity of demand for unique products tends to be

Accepted Answer

A) highly elastic. 
B) highly inelastic. 
C) both a and b 
D) none of the above 
A) highly elastic. 
B) highly inelastic. 
C) both a and b 
D) none of the above

Question 10

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 above 
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 above

Question 11

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 12

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can

Accepted Answer

A) not mitigate the effects of exchange rate changes. 
B) lessen the effect of exchange rate changes by sourcing from where input costs are low. 
C) focus on selling commodity products with product differentiation. 
D) pursue a strategy of increasing its products price elasticity of demand. 
A) not mitigate the effects of exchange rate changes. 
B) lessen the effect of exchange rate changes by sourcing from where input costs are low. 
C) focus on selling commodity products with product differentiation. 
D) pursue a strategy of increasing its products price elasticity of demand.

Question 13

A U.S.firm holds an asset in Great Britain and faces the following scenario: $$\begin{array} { l c c c } 
& \text { State } 1 & \text { State } 2 & \text { State } 3 \
\text { Probability } & 25 \% & 50 \% & 25 \% \
\hline \text { Spot rate } & \$ 2.50 / £ & \$ 2.00 / £ & \$ 1.60 / £ \
P ^ { * } & £ 1,800 & £ 2,250 & £ 2,812.50
\end{array}$$ 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($/$\le$)= $2/$\le$.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 14

S.firm holds an asset in Italy and faces the following scenario: $$\begin{array} { l c c c } 
& \text { State 1 } & \text { State 2 } & \text { State 3 } \
\text { Probability } & 30 \% & 40 \% & 30 \% \
\hline \text { Spot rate } & \$ 2.50 & \$ 1.50 & \$ 0.90 \
P ^ { * } & € 1,350.00 & € 2,250.00 & € 3,750.00
\end{array}$$ 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($/$\le$)= $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 15

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 16

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. $$\begin{array} { | c c l l l | } 
\hline \text { State } & \text { Probability } & P ^ { * } & S & S \times P ^ { * } \
\hline \mathbf { 1 } & 1 / 3 & £ 1,000 & \$ 1.40 / £ & \$ 1,400 \
\hline \mathbf { 2 } & 1 / 3 & £ 1,000 & \$ 1.50 / £ & \$ 1,500 \
\hline \mathbf { 3 } & 1 / 3 & £ 1,000 & \$ 1.60 / £ & \$ 1,600 \
\hline
\end{array}$$ 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 17

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 above 
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 above

Question 18

The exposure coefficient in the regression $P = a + b \times S + e$ is given by:

Accepted Answer

A)  $b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( S ) }$ 
B)  $P = a + b \times S + e$ 
C)  $b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( P ) }$ 
A)  $b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( S ) }$ 
B)  $P = a + b \times S + e$ 
C)  $b = \frac { \operatorname { Cov } ( P , S ) } { \operatorname { Var } ( P ) }$

Question 19

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 conclusions are correct?

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 converted to a higher U.S.dollar cash flow. 
C) Both a and b 
D) None of the above 
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 converted to a higher U.S.dollar cash flow. 
C) Both a and b 
D) None of the above

Question 20

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can

Accepted Answer

A) lessen the effect of exchange rate changes by pursuing a strategy of diversifying the markets in which the firm's products are sold. 
B) not mitigate the effects of exchange rate changes. 
C) lessen the effect of exchange rate changes by pursuing a strategy of selling commodity products without product differentiation. 
D) pursue a strategy of increasing its products price elasticity of demand. 
A) lessen the effect of exchange rate changes by pursuing a strategy of diversifying the markets in which the firm's products are sold. 
B) not mitigate the effects of exchange rate changes. 
C) lessen the effect of exchange rate changes by pursuing a strategy of selling commodity products without product differentiation. 
D) pursue a strategy of increasing its products price elasticity of demand.

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

In recent years,the U.S.dollar has depreciated substantially against most major currencies of the world,especially against the euro.

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

Which of the following is false?

From the perspective of the U.S.firm that owns an asset in Britain,the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S using the regression equation $P = a + b \times S + e$ is

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

The price elasticity of demand for unique products tends to be

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

Which of the following conclusions are correct?

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can

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?

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

The exposure coefficient in the regression $P = a + b \times S + e$ is given by:

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 conclusions are correct?

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can

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

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

In recent years,the U.S.dollar has depreciated substantially against most major currencies of the world,especially against the euro.

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

Which of the following is false?

From the perspective of the U.S.firm that owns an asset in Britain,the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S using the regression equation P=a+b×S+eP = a + b \times S + eP=a+b×S+e is

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)​

The price elasticity of demand for unique products tends to be

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

Which of the following conclusions are correct?

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can

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?

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

The exposure coefficient in the regression P=a+b×S+eP = a + b \times S + eP=a+b×S+e is given by:

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 conclusions are correct?

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries)can

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

From the perspective of the U.S.firm that owns an asset in Britain,the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S using the regression equation $P = a + b \times S + e$ is

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

The exposure coefficient in the regression $P = a + b \times S + e$ is given by: