Exam 10: Measuring Exposure to Exchange Rate Fluctuations

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

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

An MNC can avoid translation exposure if its foreign subsidiaries do not remit their earnings to the parent.

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

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

U.S.-based Majestic Co. sells products to U.S. consumers and purchases all of its materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:

The degree to which a firm's present value of future cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure.

Exhibit 10-2 Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last 50 months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. ​ -Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.

Because creditors may prefer that firms maintain low exposure to exchange rate risk, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably relevant.

If an MNC expects cash inflows of equal amounts in two currencies, and the two currencies are ____ correlated, the MNC's transaction exposure is relatively ____.

​Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.

A purely domestic firm is never exposed to exchange rate fluctuations.

An MNC's stock valuation will not be affected by translation exposure if the MNC's consolidated financial statements are prepared according to the accounting rules in FASB 52.

Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for the next several years. If the Japanese yen appreciates, Jenco's imports from Japan will probably ____ and if the Japanese yen depreciates, its imports from Japan will probably ____.

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

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

Under FASB 52, consolidated earnings are sensitive to the functional currency's weighted average exchange rate.

​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 ____.

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

Exhibit 10-2 Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last 50 months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. -Refer to Exhibit 10-2. What is the portfolio standard deviation?