Exam 12: Operating Exposure

The empirical evidence strongly supports the proposition that contractual hedges can effectively eliminate operating exposure.

A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet.

A ________ occurs when two business firms in separate countries arrange to borrow each other's currency for a specified period of time.

Expected changes in foreign exchange rates should already be factored into anticipated operating results by management and investors.

Even though contracts are often fixed in the short run,as time passes,prices and costs can be changed to reflect the new competitive realities caused by a change in exchange rates.

An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by paying for imports from Canada in Japanese yen.This hedging strategy is known as:

An unexpected change in exchange rates impacts a firm's expected cash flows at three levels,depending on the time horizon used (Short Run,Medium Run,and Long Run).Describe the three operating exposure's phases of adjustment assuming that parity conditions do not hold among foreign exchange rates,national inflation rates,and national interest rates (disequilibrium).

A Canadian firm with a U.S.subsidiary and a U.S.firm with a Canadian subsidiary agree to a parallel loan agreement.In such an agreement,the Canadian firm is making a/an ________ loan to the ________ subsidiary while effectively financing the ________ subsidiary.

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?

Most swap dealers arrange swaps so that each firm that is a party to the transaction knows who the counterparty is.

Swap agreements are treated as off-balance sheet transactions via U.S.accounting methods.

Brimmo Motorcycles Inc.,a U.S.-based firm,manufactures and sells electric motorcycles both domestically and internationally.A sudden and unexpected appreciation of the U.S.dollar should allow sales to ________ at home and ________ abroad.(Assume other factors remain unchanged.)

Operating cash flows may occur in different currencies and at different times,but financing cash flows may occur only in a single currency.

Diversification is possibly the best technique for reducing the problems associated with international transactions.Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk.

Which one of the following management techniques is likely to best offset the risk of long-run exposure to payables denominated in a particular foreign currency?

The strategy management undertakes in response to unexpected changes in exchange rates depends to a large measure on their opinion about the price elasticity of demand.

Which of the following is NOT an example of a financial cash flow?

Moral hazard may occur when a firm or individual takes on more risk when it knows that someone else will "pick up the tab."