Question 1

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

Accepted Answer

A)  economic exposure. 
B)  transaction exposure. 
C)  translation exposure. 
D)  economic exposure AND transaction exposure. 
A)  economic exposure. 
B)  transaction exposure. 
C)  translation exposure. 
D)  economic exposure AND transaction exposure. A

Question 2

A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency.

Accepted Answer

A) True 
 B)False  False

Question 3

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

Question 4

The maximum one-day loss estimated using the value-at-risk (VaR) method is independent of the confidence level used.

Accepted Answer

A) True 
 B)False

Question 5

​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 ____.

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 
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 6

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

Accepted Answer

A)  ​are; are not 
B)  ​are; are 
C)  ​are not; are not 
D)  ​are not; are 
A)  ​are; are not 
B)  ​are; are 
C)  ​are not; are not 
D)  ​are not; are

Question 7

​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. 
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 8

Currency correlations are generally negative.

Accepted Answer

A) True 
 B)False

Question 9

Translation exposure affects an MNC's cash flows.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

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

Question 11

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 12

​Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.

Accepted Answer

A)  ​favorably; stronger 
B)  ​favorably; weaker 
C)  ​not; stronger 
D)  ​not; weaker 
A)  ​favorably; stronger 
B)  ​favorably; weaker 
C)  ​not; stronger 
D)  ​not; weaker

Question 13

Some MNCs are subject to economic exposure without being subject to transaction exposure.

Accepted Answer

A) True 
 B)False

Question 14

​Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP); 25 percent of the MNC's funds are Taiwan dollars and 75 percent are pounds. The standard deviation of exchange movements is 7 percent for Taiwan dollars and 5 percent for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:

Accepted Answer

A)  ​5.13 percent. 
B)  ​2.63 percent. 
C)  ​4.33 percent. 
D)  ​5.55 percent. 
A)  ​5.13 percent. 
B)  ​2.63 percent. 
C)  ​4.33 percent. 
D)  ​5.55 percent.

Question 15

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

Accepted Answer

A) True 
 B)False

Question 16

Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.

Accepted Answer

A) True 
 B)False

Question 17

​Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.

Accepted Answer

A)  ​reduction; reduction 
B)  ​increase; increase 
C)  ​increase; reduction 
D)  ​reduction; increase 
A)  ​reduction; reduction 
B)  ​increase; increase 
C)  ​increase; reduction 
D)  ​reduction; increase

Question 18

Which of the following operations benefit(s) from depreciation of the firm's local currency?

Accepted Answer

A)  borrowing in a foreign country and converting the funds to the local currency prior to the depreciation 
B)  purchasing foreign supplies 
C)  investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency 
D)  borrowing in a foreign country and converting the funds to the local currency prior to the depreciation AND purchasing foreign supplies 
A)  borrowing in a foreign country and converting the funds to the local currency prior to the depreciation 
B)  purchasing foreign supplies 
C)  investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency 
D)  borrowing in a foreign country and converting the funds to the local currency prior to the depreciation AND purchasing foreign supplies

Question 19

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

Question 20

A set of currency cash inflows is more volatile if the correlations are low.

Accepted Answer

A) True 
 B)False

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

A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency.

The maximum one-day loss estimated using the value-at-risk (VaR) method is independent of the confidence level used.

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 .

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

Currency correlations are generally negative.

Translation exposure affects an MNC's cash flows.

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

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.

Generally, MNCs with less foreign revenues than foreign costs will be affected by a foreign currency.

Some MNCs are subject to economic exposure without being subject to transaction exposure.

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.

Appreciation in a firm's local currency causes a(n) in cash inflows and a(n) in cash outflows.

Which of the following operations benefit(s) from depreciation of the firm's local currency?

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 .

A set of currency cash inflows is more volatile if the correlations are low.

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 Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 10: Measuring Exposure to Exchange Rate Fluctuations

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

A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency.

The maximum one-day loss estimated using the value-at-risk (VaR) method is independent of the confidence level used.

​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 ____.

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

Currency correlations are generally negative.

Translation exposure affects an MNC's cash flows.

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

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.

​Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.

Some MNCs are subject to economic exposure without being subject to transaction exposure.

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.

​Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.

Which of the following operations benefit(s) from depreciation of the firm's local currency?

​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 ____.

A set of currency cash inflows is more volatile if the correlations are low.

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 Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

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 .

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

Generally, MNCs with less foreign revenues than foreign costs will be affected by a foreign currency.

Appreciation in a firm's local currency causes a(n) in cash inflows and a(n) in cash outflows.

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 .