Question 1

A firm produces products for which substitute products are produced in all countries. Depreciation of the firm's local currency should:

Accepted Answer

A)  decrease local sales as foreign competition in local markets is reduced. 
B)  decrease the firm's exports denominated in the local currency. 
C)  decrease the returns earned on the firm's foreign bank deposits. 
D)  decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. 
E)  None of these are correct. 
A)  decrease local sales as foreign competition in local markets is reduced. 
B)  decrease the firm's exports denominated in the local currency. 
C)  decrease the returns earned on the firm's foreign bank deposits. 
D)  decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. 
E)  None of these are correct.

Question 2

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 these are correct. 
A)  greater; smaller 
B)  smaller; greater 
C)  greater; greater 
D)  None of these are correct.

Question 3

Which of the following operations benefits from appreciation of the firm's local currency?

Accepted Answer

A)  borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation 
B)  receiving earnings dividends from foreign subsidiaries 
C)  purchasing supplies locally rather than overseas 
D)  exporting to foreign countries 
A)  borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation 
B)  receiving earnings dividends from foreign subsidiaries 
C)  purchasing supplies locally rather than overseas 
D)  exporting to foreign countries

Question 4

​Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL); 30 percent of the MNC's funds are lev and 70 percent are leu. The standard deviation of exchange movements is 10 percent for lev and 15 percent 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:

Accepted Answer

A)  ​17.28 percent. 
B)  ​13.15 percent. 
C)  ​14.50 percent. 
D)  ​12.04 percent. 
A)  ​17.28 percent. 
B)  ​13.15 percent. 
C)  ​14.50 percent. 
D)  ​12.04 percent.

Question 5

Economic exposure can affect:

Accepted Answer

A)  MNCs only. 
B)  purely domestic firms only. 
C)  MNCs only AND purely domestic firms only. 
D)  None of these are correct. 
A)  MNCs only. 
B)  purely domestic firms only. 
C)  MNCs only AND purely domestic firms only. 
D)  None of these are correct.

Question 6

Treck Co. expects to pay €200,000 in one month for its imports from Spain. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VaR) method based on a 95 percent confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is -2 percent? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23.

Accepted Answer

A)  -$38,468 
B)  -$21,371 
C)  -$17,097 
D)  -$4,274 
A)  -$38,468 
B)  -$21,371 
C)  -$17,097 
D)  -$4,274

Question 7

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 these are correct. 
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 these are correct.

Question 8

Economic exposure refers to:

Accepted Answer

A)  the exposure of a firm's international transactions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C)  the exposure of a firm's financial statements to exchange rate fluctuations. 
D)  the exposure of a firm's cash flows to exchange rate fluctuations. 
E)  the exposure of a country's economy (specifically GDP) to exchange rate fluctuations. 
A)  the exposure of a firm's international transactions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C)  the exposure of a firm's financial statements to exchange rate fluctuations. 
D)  the exposure of a firm's cash flows to exchange rate fluctuations. 
E)  the exposure of a country's economy (specifically GDP) to exchange rate fluctuations.

Question 9

The Canadian dollar's volatility has changed over time but is normally less than the volatility of other currencies.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

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

Question 11

One argument why exchange rate risk is irrelevant to corporations is that shareholders may be able to hedge this risk individually.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 the firm's 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.

Accepted Answer

A)  negative; positive 
B)  positive; positive 
C)  positive; negative 
D)  negative; negative 
A)  negative; positive 
B)  positive; positive 
C)  positive; negative 
D)  negative; negative

Question 15

Lazer Co. is a U.S. firm that exports computers to Belgium, invoiced in euros, and to Italy, invoiced in dollars. Additionally, Lazer Co. has a subsidiary in South Korea that produces computers and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:

Accepted Answer

A)  transaction exposure. 
B)  economic exposure. 
C)  translation exposure. 
D)  All of these are correct. 
A)  transaction exposure. 
B)  economic exposure. 
C)  translation exposure. 
D)  All of these are correct.

Question 16

Since earnings can affect stock prices, many MNCs are concerned about translation exposure.

Accepted Answer

A) True 
 B)False

Question 17

A reduction in hedging will probably reduce transaction exposure.

Accepted Answer

A) True 
 B)False

Question 18

Transaction exposure reflects:

Accepted Answer

A)  the exposure of a firm's international transactions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C)  the exposure of a firm's financial statements to exchange rate fluctuations. 
D)  the exposure of a firm's cash flows to exchange rate fluctuations. 
A)  the exposure of a firm's international transactions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C)  the exposure of a firm's financial statements to exchange rate fluctuations. 
D)  the exposure of a firm's cash flows to exchange rate fluctuations.

Question 19

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.

Accepted Answer

A)  weak; somewhat stable 
B)  weak; favorably affected 
C)  weak; adversely affected 
D)  None of these are correct. 
A)  weak; somewhat stable 
B)  weak; favorably affected 
C)  weak; adversely affected 
D)  None of these are correct.

Question 20

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

Accepted Answer

A) True 
 B)False

A firm produces products for which substitute products are produced in all countries. Depreciation of the firm's local currency should:

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.

Which of the following operations benefits from appreciation of the firm's local currency?

Economic exposure can affect:

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

Economic exposure refers to:

The Canadian dollar's volatility has changed over time but is normally less than the volatility of other currencies.

One argument why exchange rate risk is irrelevant to corporations is that shareholders may be able to hedge this risk individually.

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

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

Lazer Co. is a U.S. firm that exports computers to Belgium, invoiced in euros, and to Italy, invoiced in dollars. Additionally, Lazer Co. has a subsidiary in South Korea that produces computers and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:

Since earnings can affect stock prices, many MNCs are concerned about translation exposure.

A reduction in hedging will probably reduce transaction exposure.

Transaction exposure reflects:

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During dollar cycles, cash outflows are .

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

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

A firm produces products for which substitute products are produced in all countries. Depreciation of the firm's local currency should:

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.

Which of the following operations benefits from appreciation of the firm's local currency?

Economic exposure can affect:

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

Economic exposure refers to:

The Canadian dollar's volatility has changed over time but is normally less than the volatility of other currencies.

One argument why exchange rate risk is irrelevant to corporations is that shareholders may be able to hedge this risk individually.

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

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

Lazer Co. is a U.S. firm that exports computers to Belgium, invoiced in euros, and to Italy, invoiced in dollars. Additionally, Lazer Co. has a subsidiary in South Korea that produces computers and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:

Since earnings can affect stock prices, many MNCs are concerned about translation exposure.

A reduction in hedging will probably reduce transaction exposure.

Transaction exposure reflects:

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.

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

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

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.

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During dollar cycles, cash outflows are .