Exam 12: Operating Exposure

The variability of a firm's operating cash flows is probably reduced by international diversification of its production,sourcing,and sales because exchange rate changes under disequilibrium conditions are likely to increase the firm's competitiveness in some markets while reducing it in others.

Costs associated with the purchase of sizeable put options positions include each of the following EXCEPT:

The particular strategy of trying to offset stable inflows of cash from one country with outflows of cash in the same currency is known as:

Diversification is possibly the best technique for reducing the problems associated with international transactions.Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk.

Which of the following is probably NOT an advantage of foreign exchange risk management?

A British firm and a U.S.Corporation each wish to enter into a currency swap hedging agreement.The British firm is receiving U.S.dollars from sales in the U.S.but wants pounds.The U.S.firm is receiving pounds from sales in Britain but wants dollars.Which of the following choices would best satisfy the desires of the firms?

Moral hazard may occur when a firm or individual takes on more risk when it knows that someone else will "pick up the tab."

Recently the Canadian dollar realized an unexpected appreciation in value.Which of the following actions being considered by Tall Timber Exports,a Canadian logging firm specializing in exporting raw forest products,would be considered a highly unlikely response to the appreciation of the Canadian dollar?

Unexpected changes in exchange rates is never good news for a firm's operating income.

The empirical evidence strongly supports the proposition that contractual hedges can effectively eliminate operating exposure.

Operating cash flows may occur in different currencies and at different times,but financing cash flows may occur only in a single currency.

Most swap dealers arrange swaps so that each firm that is a party to the transaction does not know who the counterparty is.

After being introduced in the 1980s,currency swaps have gained increasing importance as financial derivative instruments.

Brimmo Motorcycles Inc. ,a U.S.-based firm,manufactures and sells electric motorcycles both domestically and internationally.A sudden and unexpected appreciation of the U.S.dollar should allow sales to ________ at home and ________ abroad.(Assume other factors remain unchanged. )

Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria because:

Simpson Sign Company based in Frostbite Falls,Minnesota has a 6-month C$100,000 contract to complete sign work in Winnipeg,Manitoba,Canada.The current spot rate is $1.02/C$ and the forward rate is $1.01/C$.Under conditions of equilibrium,management would use ________ today when preparing operating budgets.

Which of the following is NOT an example of diversifying operations?

A ________ occurs when two business firms in separate countries arrange to borrow each other's currency for a specified period of time.

Management must be able to predict disequilibria in international markets to take advantage of diversification strategies.

After being introduced in the 1980s,currency swaps have remained a relatively insignificant financial derivative instrument.