Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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 __________ affected.

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 C

Question 3

In general,translation exposure is more closely monitored when the foreign earnings of the subsidiaries are more likely to be remitted to the parent.

Accepted Answer

A) True 
 B)False  True

Question 4

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.

Accepted Answer

A)  strong dollar;favorably 
B)  weak dollar;not 
C)  strong dollar;not 
D)  weak dollar;favorably 
A)  strong dollar;favorably 
B)  weak dollar;not 
C)  strong dollar;not 
D)  weak dollar;favorably

Question 5

Which of the following is not a form of exposure to exchange rate fluctuations

Accepted Answer

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

Question 6

A company may become more exposed or sensitive to an individual currency's movements over time for several reasons,including a reduction in hedging,a greater involvement in the foreign country,or an increased use of the foreign currency.

Accepted Answer

A) True 
 B)False

Question 7

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 8

Consider an MNC that is exposed to the Bulgarian lev (BGL)and the Romanian leu (ROL).30% of the MNC's funds are lev and 70% are leu.The standard deviation of exchange movements is 10% for lev and 15% 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%. 
B)  13.15%. 
C)  14.50%. 
D)  12.04%. 
A)  17.28%. 
B)  13.15%. 
C)  14.50%. 
D)  12.04%.

Question 9

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

Question 10

Economic exposure can affect:

Accepted Answer

A)  MNCs only. 
B)  purely domestic firms only. 
C)  A and B 
D)  none of the above 
A)  MNCs only. 
B)  purely domestic firms only. 
C)  A and B 
D)  none of the above

Question 11

Two highly negatively correlated currencies act almost as if they are the same currency.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.

Accepted Answer

A) True 
 B)False

Question 14

Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000,while Subsidiary B has net outflows in Australian dollars of A$1,500,000.The expected exchange rate of the Australian dollar is $.55.What is the net inflow or outflow as measured in U.S.dollars

Accepted Answer

A)  $500,000 outflow. 
B)  $500,000 inflow. 
C)  $275,000 inflow. 
D)  $275,000 outflow. 
A)  $500,000 outflow. 
B)  $500,000 inflow. 
C)  $275,000 inflow. 
D)  $275,000 outflow.

Question 15

Cerra Co.expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands.Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days.Assume that these percentage changes are normally distributed.Using the value-at-risk (VAR)method based on a 95% confidence level,what is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5% The current spot rate of the euro (before considering the maximum one-day loss)is $1.01.

Accepted Answer

A)  -$75,750. 
B)  -$60,600. 
C)  -$111,100. 
D)  -$25,250. 
A)  -$75,750. 
B)  -$60,600. 
C)  -$111,100. 
D)  -$25,250.

Question 16

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.

Question 17

Dubas Co.is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece.Both subsidiaries frequently remit their earnings back to the parent company.The German subsidiary generated a net outflow of €2,000,000 this year,while the Greek subsidiary generated a net inflow of €1,500,000.What is the net inflow or outflow as measured in U.S.dollars this year The exchange rate for the euro is $1.05.

Accepted Answer

A)  $3,675,000 outflow 
B)  $525,000 outflow 
C)  $525,000 inflow 
D)  $210,000 outflow 
A)  $3,675,000 outflow 
B)  $525,000 outflow 
C)  $525,000 inflow 
D)  $210,000 outflow

Question 18

Transaction exposure reflects:

Accepted Answer

A)  the exposure of a firm's ongoing international transac tions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transac tions 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 ongoing international transac tions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transac tions 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

The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):
$$
P C F_{t}=a_{0}+a_{1} e_{t}+\mu_{t}
$$
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period $ t $, and $ e_{t} $ is the percentage change in the exchange rate of the currency over period $ t $. The regression was run over two subperiods for each of the two currencies, with the following results:
 
Based on these results,which of the following statements is probably not true?

Accepted Answer

A)  The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod. 
B)  The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod. 
C)  The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod. 
D)  The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod. 
E)  All of the above are true. 
A)  The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod. 
B)  The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod. 
C)  The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod. 
D)  The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod. 
E)  All of the above are true.

Question 20

Jacko Co.is a U.S.based MNC with net cash inflows of Singapore dollars 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 high 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.

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

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 ____ affected.

In general,translation exposure is more closely monitored when the foreign earnings of the subsidiaries are more likely to be remitted to the parent.

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.

Which of the following is not a form of exposure to exchange rate fluctuations

A company may become more exposed or sensitive to an individual currency's movements over time for several reasons,including a reduction in hedging,a greater involvement in the foreign country,or an increased use of the foreign currency.

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

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

Economic exposure can affect:

Two highly negatively correlated currencies act almost as if they are the same currency.

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

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.

Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000,while Subsidiary B has net outflows in Australian dollars of A$1,500,000.The expected exchange rate of the Australian dollar is $.55.What is the net inflow or outflow as measured in U.S.dollars

Transaction exposure reflects:

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

Multinational Restructuring

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 10: Measuring Exposure to Exchange Rate Fluctuations

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

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 __________ affected.

In general,translation exposure is more closely monitored when the foreign earnings of the subsidiaries are more likely to be remitted to the parent.

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.

Which of the following is not a form of exposure to exchange rate fluctuations

A company may become more exposed or sensitive to an individual currency's movements over time for several reasons,including a reduction in hedging,a greater involvement in the foreign country,or an increased use of the foreign currency.

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

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

Economic exposure can affect:

Two highly negatively correlated currencies act almost as if they are the same currency.

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

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.

Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000,while Subsidiary B has net outflows in Australian dollars of A$1,500,000.The expected exchange rate of the Australian dollar is $.55.What is the net inflow or outflow as measured in U.S.dollars

Transaction exposure reflects:

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

Multinational Restructuring

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term 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 ____ affected.

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.