Question 1

Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is $.012 while the present exchange rate of the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will:

Accepted Answer

A)  benefit, because the dollar value of its pound position exceeds the dollar value of its yen position. 
B)  benefit, because the dollar value of its yen position exceeds the dollar value of its pound position. 
C)  be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position. 
D)  be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.

Question 2

A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.

Accepted Answer

A) True 
 B)False

Question 3

Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary's revenue will ____, and its expenses will ____.

Accepted Answer

A)  increase; decrease 
B)  decrease; remain unchanged 
C)  decrease; increase 
D)  increase; remain unchanged

Question 4

U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margin.

Accepted Answer

A) True 
 B)False

Question 5

Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 97.5% confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that current spot rate of the euro (before considering the maximum one-month loss) is $1.35.

Accepted Answer

A)  -$4,303 
B)  -$7,830 
C)  -$5,873 
D)  -$1,958

Question 6

If a U.S. firm's cost of goods sold in Switzerland is much greater than its sales in Switzerland, the appreciation of the Swiss franc has a ____ impact on the firm's ____.

Accepted Answer

A)  positive; interest expenses 
B)  positive; gross profit 
C)  negative; gross profit 
D)  negative; interest expenses

Question 7

The ____ the percentage of an MNC's business conducted by its foreign subsidiaries, the ____ the percentage of a given financial statement item that is susceptible to translation exposure.

Accepted Answer

A)  greater; smaller 
B)  smaller; greater 
C)  greater; greater 
D)  none of the above

Question 8

If the U.S. dollar appreciates, an MNC's:

Accepted Answer

A)  U.S. sales will probably decrease. 
B)  exports denominated in U.S. dollars will probably increase. 
C)  interest owed on foreign funds borrowed will probably increase. 
D)  exports denominated in foreign currencies will probably increase. 
E)  all of the above

Question 9

When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ____ affected.

Accepted Answer

A)  favorably; favorably affected but by a smaller degree 
B)  favorably; favorably affected by a higher degree 
C)  unfavorably; favorably affected 
D)  favorably; unfavorably affected

Question 10

In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries.

Accepted Answer

A) True 
 B)False

Question 11

If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc's depreciation against the dollar on ____.

Accepted Answer

A)  positive; interest expenses 
B)  positive; gross profit 
C)  negative; gross profit 
D)  negative; interest expenses

Question 12

If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ____ impact on the firm's ____.

Accepted Answer

A)  positive; interest expenses 
B)  positive; gross profit 
C)  negative; interest expenses 
D)  negative; gross profit

Question 13

If exchange rate movements are less volatile in the past than in the future, the estimated maximum expected loss derived from the VAR method will be underestimated.

Accepted Answer

A) True 
 B)False

Question 14

Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

Accepted Answer

A)  Diz Co. 
B)  Yanta Co. 
C)  the firms have about the same level of exposure. 
D)  neither firm has any exposure.

Exam 10: Measuring Exposure to Exchange Rate Fluctuations

A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.

U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margin.

If a U.S. firm's cost of goods sold in Switzerland is much greater than its sales in Switzerland, the appreciation of the Swiss franc has a impact on the firm's .

The the percentage of an MNC's business conducted by its foreign subsidiaries, the the percentage of a given financial statement item that is susceptible to translation exposure.

If the U.S. dollar appreciates, an MNC's:

When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are affected by translation exposure. When the dollar weakens, the reported consolidated earnings are affected.

In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries.

If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a overall impact of the Swiss franc's depreciation against the dollar on .

If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a impact on the firm's .

If exchange rate movements are less volatile in the past than in the future, the estimated maximum expected loss derived from the VAR method will be underestimated.