Question 1

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

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 3

Operating exposure can be defined as

Accepted Answer

A) the link between the future home currency values of the firm's assets and liabilities and exchange rate fluctuations. 
B) the extent to which the firm's operating cash flows would be affected by random changes in exchange rates. 
C) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. 
D) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates. 
A) the link between the future home currency values of the firm's assets and liabilities and exchange rate fluctuations. 
B) the extent to which the firm's operating cash flows would be affected by random changes in exchange rates. 
C) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. 
D) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates.

Question 4

Which of the following conclusions are correct?

Accepted Answer

A) Most of the volatility of the dollar value of the Israeli 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 Israeli asset cannot 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 Israeli asset cannot be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2, respectively. 
D) Most of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2 respectively. 
A) Most of the volatility of the dollar value of the Israeli 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 Israeli asset cannot 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 Israeli asset cannot be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2, respectively. 
D) Most of the volatility of the dollar value of the Israeli asset can be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2 respectively.

Question 5

Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a depreciation of the dollar against the euro, which of the following describes the conversion effect of the depreciation?

Accepted Answer

A) The cash flow in euro could be altered due a change 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) Both a and b 
D) None of the above 
A) The cash flow in euro could be altered due a change 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) Both a and b 
D) None of the above

Question 6

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 is 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 is true

Question 7

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 8

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 above 
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 above

Question 9

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) $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 10

The link between a firm's future operating cash flows 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 11

A U.S. firm holds an asset in Israel and faces the following scenario:   where,
PS1U1P1*S1S1P0 = 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 12

Consider a U.S.-based MNC with a wholly-owned French subsidiary. Following a depreciation of the dollar against the euro, which of the following best describes the mechanism of any effect of the depreciation?

Accepted Answer

A) The change in the cash flow in euro due an alteration in the firm's competitive position in the marketplace is in part a function of the elasticity of demand for the firm's product. 
B) A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow regardless of the firm's hedging program. 
C) Both a and b 
D) None of the above 
A) The change in the cash flow in euro due an alteration in the firm's competitive position in the marketplace is in part a function of the elasticity of demand for the firm's product. 
B) A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow regardless of the firm's hedging program. 
C) Both a and b 
D) None of the above

Question 13

A firm's operating exposure is

Accepted Answer

A) defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates. 
B) determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products. 
C) determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing. 
D) all of the above 
A) defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates. 
B) determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products. 
C) determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing. 
D) all of the above

Question 14

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   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 15

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 cannot 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 cannot 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 cannot 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 cannot 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 16

A U.S. firm holds an asset in Israel and faces the following scenario:   where,
PS1U1P1*S1S1P0 = Israeli shekel (IS) 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) 0.001968 
B) 0.002969 
C) 0.003968 
D) 0.004968 
A) 0.001968 
B) 0.002969 
C) 0.003968 
D) 0.004968

Question 17

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 18

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 above. 
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 above.

Question 19

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 20

Which of the following are identified by your text as a strategy for managing operating exposure: 1) Selecting low-cost production sites
2) Flexible sourcing policy
3) Diversification of the market
4) Product differentiation and R&D efforts
5) Financial Hedging

Accepted Answer

A) 1), 3), and 5) only 
B) 2) and 4) only 
C) 1), 4), and 5) only 
D) 1), 2), 3), 4), and 5) 
A) 1), 3), and 5) only 
B) 2) and 4) only 
C) 1), 4), and 5) only 
D) 1), 2), 3), 4), and 5)

Exam 9: Management of Economic Exposure

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

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

Operating exposure can be defined as

Which of the following conclusions are correct?

Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a depreciation of the dollar against the euro, which of the following describes the conversion effect of the depreciation?

Which of the following is a true statement?

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

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

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

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

Consider a U.S.-based MNC with a wholly-owned French subsidiary. Following a depreciation of the dollar against the euro, which of the following best describes the mechanism of any effect of the depreciation?

A firm's operating exposure is

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 is

Which of the following conclusions are correct?

A U.S. firm holds an asset in Israel and faces the following scenario: where, P* = Israeli shekel (IS) price of the asset held by the U.S. firm P = Dollar price of the same asset -The variance of the exchange rate is:

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

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

In recent years,

Which of the following are identified by your text as a strategy for managing operating exposure: 1) Selecting low-cost production sites 2) Flexible sourcing policy 3) Diversification of the market 4) Product differentiation and R&D efforts 5) Financial Hedging

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($/£) = $2/£. Your cash flows in state 1, 2, and 3 respectively will be

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

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

A U.S. firm holds an asset in Israel and faces the following scenario: where, P^* = Israeli shekel (IS) price of the asset held by the U.S. firm P = Dollar price of the same asset -The variance of the exchange rate is: