Question 1

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 above 
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 above

Question 2

A purely domestic firm that sources and sells only domestically,

Accepted Answer

A) faces exchange rate risk to the extent that it has international competitors in the domestic market. 
B) faces no exchange rate risk. 
C) should never hedge since this could actually increase its currency exposure. 
D) both b and c 
A) faces exchange rate risk to the extent that it has international competitors in the domestic market. 
B) faces no exchange rate risk. 
C) should never hedge since this could actually increase its currency exposure. 
D) both b and c

Question 3

The "exposure" (i.e. the regression coefficient beta) is:

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 4

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) Both a and b 
D) None of the above 
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) Both a and b 
D) None of the above

Question 5

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.

Question 6

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.   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 7

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 8

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 9

Which of the following would be an effective hedge?

Accepted Answer

A) Sell £2,278.13 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($/£), that prevails at time zero. 
D) None of the above 
A) Sell £2,278.13 forward at the 1-year forward rate, F1($/£), 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 above

Question 10

The exposure coefficient in the regression   is given by:

Accepted Answer

A)    
B)    
C)    
A)    
B)    
C)

Question 11

A U.S. firm holds an asset in Great Britain and faces the following scenario:   where,
PS1U1P1*S1S1P0 = 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 above 
A) $5,050 
B) $4,500 
C) $2,112.50 
D) none of the above

Question 12

Find an effective hedge financial hedge if a U.S. firm holds an asset in Great Britain and faces the following scenario:   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   The regression coefficient beta is calculated as   Where   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
Which of the following is the most effective hedge financial hedge?

Accepted Answer

A) Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
B) Buy £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
C) Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
D) 0.25 × £3,000 + 0.50 × £2,500 + 0.25 × £2,000 = £2,500 
A) Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
B) Buy £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
C) Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. 
D) 0.25 × £3,000 + 0.50 × £2,500 + 0.25 × £2,000 = £2,500

Question 13

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 14

Exposure to currency risk can be measured by the sensitivities of

Accepted Answer

A) the future home currency values of the firm's assets and liabilities. 
B) the firm's operating cash flows to random changes in exchange rates. 
C) both a and b 
D) none of the above 
A) the future home currency values of the firm's assets and liabilities. 
B) the firm's operating cash flows to random changes in exchange rates. 
C) both a and b 
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

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

Accepted Answer

A) 5 
B) 10 
C) 15 
D) 75 
A) 5 
B) 10 
C) 15 
D) 75

Question 17

Which of the following would be an effective hedge?

Accepted Answer

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

Question 18

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.   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 19

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 20

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

Managing operating exposure

A purely domestic firm that sources and sells only domestically,

The "exposure" (i.e. the regression coefficient beta) is:

Consider a U.S. MNC with operations in Great Britain. Which of the following are potential risks following a strengthening of the dollar?

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

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

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?

Which of the following would be an effective hedge?

The exposure coefficient in the regression is given by:

A U.S. firm holds an asset in Great Britain and faces the following scenario: 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:

The price elasticity of demand for unique products tends to be

Exposure to currency risk can be measured by the sensitivities of

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

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

Which of the following would be an effective hedge?

What is the objective of managing operating exposure?

Which of the following would be an effective hedge?

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

Managing operating exposure

A purely domestic firm that sources and sells only domestically,

The "exposure" (i.e. the regression coefficient beta) is:

Consider a U.S. MNC with operations in Great Britain. Which of the following are potential risks following a strengthening of the dollar?

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

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

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?

Which of the following would be an effective hedge?

The exposure coefficient in the regression is given by:

A U.S. firm holds an asset in Great Britain and faces the following scenario: 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:

The price elasticity of demand for unique products tends to be

Exposure to currency risk can be measured by the sensitivities of

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

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

Which of the following would be an effective hedge?

What is the objective of managing operating exposure?

Which of the following would be an effective hedge?

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

A U.S. firm holds an asset in Great Britain and faces the following scenario: 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: