Question 1

MNE cash flows may be sensitive to changes in which of the following?

Accepted Answer

A) exchange rates 
B) interest rates 
C) commodity prices 
D) all of the above

Question 2

The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.

Accepted Answer

A) current rate; temporal 
B) temporal; proper timing 
C) current rate; future rate 
D) none of the above

Question 3

The main technique to minimize translation exposure is called a/an ________ hedge.

Accepted Answer

A) balance sheet 
B) income statement 
C) forward 
D) translation

Question 4

If a firm's subsidiary is using the local currency as the functional currency,which of the following is NOT a circumstance that could justify the use of a balance sheet hedge?

Accepted Answer

A) The foreign subsidiary is about to be liquidated, so that the value of its Cumulative Translation Adjustment (CT
A) would be realized. 
B) The firm has debt covenants or bank agreements that state the firm's debt/equity ratio will be maintained within specific limits. 
C) The foreign subsidiary is operating is a hyperinflationary environment. 
D) All of the above are appropriate reasons to use a balance sheet hedge.

Question 5

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities

Accepted Answer

A) have a 2:1 ratio of assets to liabilities. 
B) have a 2:1 ratio of liabilities to assets. 
C) have a 2:1 ratio of liabilities to equity. 
D) be equal.

Question 6

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
-Refer to Instruction 10.1.Money market hedges almost always return more than forward hedges because of the greater risk involved.

Accepted Answer

A) True 
 B)False

Question 7

A U.S.firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ ,the account is payable in three months,and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate.The U.S.firm is at risk today of a loss if

Accepted Answer

A) the exchange rate changes to $2.00/£. 
B) the exchange rate changes to $2.05/£. 
C) the exchange rate doesn't change. 
D) all of the above.

Question 8

Which of the following is NOT cited as a good reason for hedging currency exposures?

Accepted Answer

A) Reduced risk of future cash flows is a good planning tool. 
B) Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows. 
C) Currency risk management increases the expected cash flows to the firm. 
D) Management is in a better position to assess firm currency risk than individual investors.

Question 9

If the European subsidiary of a U.S.firm has net exposed assets of euro 500,000,and the euro increases in value from $1.30/euro to $1.35/euro the U.S.firm has a translation ________.

Accepted Answer

A) gain of $25,000 
B) loss of $25,000 
C) gain of $525,000 
D) loss of euro 525,000

Question 10

A U.S.firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ ,the account is payable in three months,and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate.If the exchange rate changes to $2.05/£ the U.S.firm will realize a ________ of ________.

Accepted Answer

A) loss; $2000 
B) gain; $2000 
C) loss; £2000 
D) gain; £2000

Question 11

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________.

Accepted Answer

A) consolidated statement of cash flow 
B) consolidated income statement 
C) consolidated balance sheet 
D) none of the above

Question 12

Transaction exposure and operating exposure exist because of unexpected changes in future cash flows.The difference between the two is that ________ exposure deals with cash flows already contracted for,while ________ exposure deals with future cash flows that might change because of changes in exchange rates.

Accepted Answer

A) transaction; operating 
B) operating; transaction 
C) operating; accounting 
D) none of the above

Question 13

________ is NOT a popular contractual hedge against foreign exchange transaction exposure.

Accepted Answer

A) Forward market hedge 
B) Money market hedge 
C) Options market hedge 
D) All of the above are contractual hedges.

Question 14

Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income,but imbalances transferred to the income statement do not.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is cited as a good reason for NOT hedging currency exposures?

Accepted Answer

A) Shareholders are more capable of diversifying risk than management. 
B) Currency risk management through hedging does not increase expected cash flows. 
C) Hedging activities are often of greater benefit to management than to shareholders. 
D) All of the above are cited as reasons NOT to hedge.

Question 16

Assuming no transaction costs (i.e.,hedging is "free"),hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time,the expected value of the cash flows should ________.

Accepted Answer

A) increase; not change 
B) decrease; not change 
C) not change; increase 
D) not change; not change

Question 17

Use the information for the following problem(s).
Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for euro 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.40/euro
∙ The six month forward rate is $1.38/euro
∙ Plains States' cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December put options for euro 625,000; strike price $1.42, premium price is 1.5%
∙ Plains States' forecast for 6-month spot rates is $1.43/euro
∙ The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $1.35/euro
-Refer to Instruction 10.1.The cost of a call option to Plains States would be ________.

Accepted Answer

A) $17,653 
B) $16,733 
C) $18,471 
D) There is not enough information to answer this question.

Question 18

________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.

Accepted Answer

A) Transaction 
B) Operating 
C) Currency 
D) Translation

Question 19

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

Accepted Answer

A) True 
 B)False

Question 20

The structure of a money market hedge is similar to a forward hedge.The difference is the cost of the money market hedge is determined by the differential interest rates,while the forward hedge is a function of the forward rates quotation.

Accepted Answer

A) True 
 B)False

Exam 10: Transaction and Translation Exposure

MNE cash flows may be sensitive to changes in which of the following?

The two basic methods for the translation of foreign subsidiary financial statements are the method and the method.

The main technique to minimize translation exposure is called a/an ________ hedge.

If a firm's subsidiary is using the local currency as the functional currency,which of the following is NOT a circumstance that could justify the use of a balance sheet hedge?

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities

Which of the following is NOT cited as a good reason for hedging currency exposures?

If the European subsidiary of a U.S.firm has net exposed assets of euro 500,000,and the euro increases in value from $1.30/euro to $1.35/euro the U.S.firm has a translation ________.

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________.

Transaction exposure and operating exposure exist because of unexpected changes in future cash flows.The difference between the two is that exposure deals with cash flows already contracted for,while exposure deals with future cash flows that might change because of changes in exchange rates.

________ is NOT a popular contractual hedge against foreign exchange transaction exposure.

Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income,but imbalances transferred to the income statement do not.

Which of the following is cited as a good reason for NOT hedging currency exposures?

Assuming no transaction costs (i.e.,hedging is "free") ,hedging currency exposures should the variability of expected cash flows to a firm and at the same time,the expected value of the cash flows should .

________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

The structure of a money market hedge is similar to a forward hedge.The difference is the cost of the money market hedge is determined by the differential interest rates,while the forward hedge is a function of the forward rates quotation.

Exam 10: Transaction and Translation Exposure

MNE cash flows may be sensitive to changes in which of the following?

The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.

The main technique to minimize translation exposure is called a/an ________ hedge.

If a firm's subsidiary is using the local currency as the functional currency,which of the following is NOT a circumstance that could justify the use of a balance sheet hedge?

A balance sheet hedge requires that the amount of exposed foreign currency assets and liabilities

Which of the following is NOT cited as a good reason for hedging currency exposures?

If the European subsidiary of a U.S.firm has net exposed assets of euro 500,000,and the euro increases in value from $1.30/euro to $1.35/euro the U.S.firm has a translation ________.

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the ________.

________ is NOT a popular contractual hedge against foreign exchange transaction exposure.

Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income,but imbalances transferred to the income statement do not.

Which of the following is cited as a good reason for NOT hedging currency exposures?

Assuming no transaction costs (i.e.,hedging is "free") ,hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time,the expected value of the cash flows should ________.

________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.

The temporal method of foreign currency translation gains or losses resulting from remeasurement are carried directly to current consolidated income and thus introduces volatility to consolidated earnings.

The structure of a money market hedge is similar to a forward hedge.The difference is the cost of the money market hedge is determined by the differential interest rates,while the forward hedge is a function of the forward rates quotation.

The two basic methods for the translation of foreign subsidiary financial statements are the method and the method.

Assuming no transaction costs (i.e.,hedging is "free") ,hedging currency exposures should the variability of expected cash flows to a firm and at the same time,the expected value of the cash flows should .