Chat with AIExam 12: Operating Exposure
A ________ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another,and after a period of time,to give back the original amounts.
(41) 
VerifiedB
Which of the following is NOT an example of an operating cash flow?
(34) VerifiedD
An unexpected change in exchange rates impacts a firm's expected cash flows at three levels,depending on the time horizon used (Short Run,Medium Run,and Long Run).Describe the three operating exposure's phases of adjustment assuming that parity conditions do not hold among foreign exchange rates,national inflation rates,and national interest rates (disequilibrium).
(42) VerifiedThe first level impact is on expected cash flows in the one-year operating budget.The gain or loss depends on the currency of denomination of expected cash flows.These are both existing transaction exposures and anticipated exposures.The currency of denomination cannot be changed for existing obligations,or even for implied obligations such as purchase or sales commitments.In the short run it is difficult to change sales prices or renegotiate factor costs.Therefore,realized cash flows will differ from those expected in the budget.
The second level impact is on expected medium-run cash flows assuming disequilibrium conditions.In this case,the firm may not be able to adjust prices and costs to reflect the new competitive realities caused by a change in exchange rates.The primary problem may be the reactions of existing competitors.The firm's realized cash flows will differ from its expected cash flows.The firm's market value may change because of the unanticipated results.
The third level impact is on expected long-run cash flows,meaning those beyond five years.At this strategic level a firm's cash flows will be influenced by the reactions of both existing competitors and potential competitors-possible new entrants-to exchange rate changes under disequilibrium conditions.In fact,all firms that are subject to international competition,whether they are purely domestic or multinational,are exposed to foreign exchange operating exposure in the long run whenever foreign exchange markets are not continuously in equilibrium.
The strategy management undertakes in response to unexpected changes in exchange rates depends to a large measure on their opinion about the price elasticity of demand.
(35) Which one of the following management techniques is likely to best offset the risk of long-run exposure to receivables denominated in a particular foreign currency?
(36) Which of the following is NOT an acceptable hedging technique to reduce risk caused by a relatively predictable long-term foreign currency inflow of Japanese yen?
(39) Diversifying the financing base means diversifying sales,location of production facilities,and raw material sources.
(40) A Canadian firm with a U.S.subsidiary and a U.S.firm with a Canadian subsidiary agree to a parallel loan agreement.In such an agreement,the Canadian firm is making a/an ________ loan to the ________ subsidiary while effectively financing the ________ subsidiary.
(36) Which one of the following management techniques is likely to best offset the risk of long-run exposure to payables denominated in a particular foreign currency?
(36) Currency swaps are exclusively for periods of time under one year.
(31) Which of the following is NOT an example of diversification in financing?
(35) An MNE has a contract for a relatively predictable long-term inflow of Japanese yen that the firm chooses to hedge by seeking out potential suppliers in Japan.This hedging strategy is referred to as:
(29) Which of the following is NOT an important impediment to widespread use of parallel loans?
(33) Swap agreements are treated as line items on the balance sheet via U.S.accounting methods.
(32) Expected changes in foreign exchange rates should already be factored into anticipated operating results by management and investors.
(42) When considering the phases of adjustment and response to operating exposure in the LONG RUN,price changes tend to be ________ and volume changes tend to be ________.
(35) NorthRim Inc.(NRI),imports extreme condition outdoor wear and equipment from The Allofit Territories Company (ATC)located in Canada.With the steady decline of the U.S dollar against the Canadian dollar NRI is finding a continued relationship with ATC to be an increasingly difficult proposition.In response to NRI's request,ATC has proposed the following risk-sharing arrangement.First,set the current spot rate of C$1.20/$ as the base rate.As long as spot rates stay within 5% (up or down)NRI will pay at the base rate.Any rate outside of the 5% range,ATC will share equally with NRI the difference between the spot rate and the base rate.If NRI had a payable of C$100,000 due today and the current spot rate were C$1.17/$,how much does would NRI owe in U.S.dollars?
(37) If a firm diversifies its financing sources,it will be pre-positioned to take advantage of temporary deviations from the International Fisher Effect.
(31) NorthRim Inc.(NRI),imports extreme condition outdoor wear and equipment from the Allofit Territories Company (ATC)located in Canada.With the steady decline of the U.S dollar against the Canadian dollar NRI is finding a continued relationship with ATC to be an increasingly difficult proposition.In response to NRI's request,ATC has proposed the following risk-sharing arrangement.First,set the current spot rate as the base rate.As long as spot rates stay within 5% (up or down)NRI will pay at the base rate.Any rate outside of the 5% range,ATC will share equally with NRI the difference between the spot rate and the base rate.If the current spot rate is C$1.20/$,what are the upper and lower limits for trading to take place at C$1.20?
(32) ________ cash flows arise from intracompany and intercompany receivables and payments,while ________ cash flows are payments for the use of loans and equity.
(35) 
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