Exam 10: Measuring Exposure to Exchange Rate Fluctuations

Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in its stock price (SPt) and the percentage change in the peso's value relative to the dollar (PESOt). SPt is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESOt variable would be in the first subperiod and in the second subperiod.

(Multiple Choice)

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Question 61

According to the text, currency variability levels perfectly stable over time, and currency correlations perfectly stable over time.

(Multiple Choice)

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Question 62

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

(True/False)

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Question 63

Which of the following is not true regarding economic exposure?

(Multiple Choice)

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Question 64

Assume that Mill Corporation, a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements: PCF_t = a₀ + a₁et + $\mu$ _t Where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a₁ of 2. This indicates that:

(Multiple Choice)

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Question 65

A reduction in hedging will probably reduce transaction exposure.

(True/False)

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Question 66

The VAR method presumes that the distribution of exchange rate movements is normal.

(True/False)

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Question 67

Two highly negatively correlated currencies move in tandem almost as if they are the same currency.

(True/False)

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Question 68

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

(True/False)

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Question 69

Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower.

(True/False)

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Question 70

____ is (are) not a determinant of translation exposure.

(Multiple Choice)

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Question 71

Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNC's funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is approximately:

(Multiple Choice)

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Question 72

Which of the following is not true regarding currency correlations?

(Multiple Choice)

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Question 73

In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely a(n) local currency.

(Multiple Choice)

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Question 74

Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen's depreciation.

(Multiple Choice)

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Question 75

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

(True/False)

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Question 76

Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:

(Multiple Choice)

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Question 77

Exhibit 10-1 Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s). -Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?

(Multiple Choice)

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Question 78

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

(True/False)

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Question 79

A company may become more exposed or sensitive to an individual currency's movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency.

(True/False)

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Question 80

Showing 61 - 80 of 94

According to the text, currency variability levels perfectly stable over time, and currency correlations perfectly stable over time.

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

Which of the following is not true regarding economic exposure?

A reduction in hedging will probably reduce transaction exposure.

The VAR method presumes that the distribution of exchange rate movements is normal.

Two highly negatively correlated currencies move in tandem almost as if they are the same currency.

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower.

____ is (are) not a determinant of translation exposure.

Which of the following is not true regarding currency correlations?

In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely a(n) local currency.

Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen's depreciation.

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

A company may become more exposed or sensitive to an individual currency's movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency.

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 10: Measuring Exposure to Exchange Rate Fluctuations

According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

Which of the following is not true regarding economic exposure?

A reduction in hedging will probably reduce transaction exposure.

The VAR method presumes that the distribution of exchange rate movements is normal.

Two highly negatively correlated currencies move in tandem almost as if they are the same currency.

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower.

____ is (are) not a determinant of translation exposure.

Which of the following is not true regarding currency correlations?

In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local currency.

Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen's depreciation.

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

A company may become more exposed or sensitive to an individual currency's movements over time for several reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign currency.

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

According to the text, currency variability levels perfectly stable over time, and currency correlations perfectly stable over time.

In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely a(n) local currency.