Exam 10: Measuring Exposure to Exchange Rate Fluctuations

The Canadian dollar consistently appears to move almost independently of other currencies.That is it exhibits low correlations with the other currencies.

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 ___________.

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

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

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 if the expected percentage change of the euro tomorrow is 0.5%

Translation exposure reflects:

A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.

If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency,then the MNCs' transaction exposure is _______ is the two currencies are ________ correlated.

Economic exposure refers to:

A reduction in hedging will probably reduce transaction exposure.

Under FASB 52:

Translation exposure is less of a concern when earnings are not remitted by the subsidiary to the parent.

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

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 its 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.

___________ exposure is the degree to which the value of future cash transactions can be affected by exchange rate fluctuations.

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 fifty 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.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.

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

Appreciation in a firm's local currency causes a(n)__________ in cash inflows and a(n)_________ in cash outflows.

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 fifty 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.What is the portfolio standard deviation

Magent Co.is a U.S.company that has exposure to the Swiss francs (SF)and Danish kroner (DK).It has net inflows of SF200 million and net outflows of DK500 million.  The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10.  Magent Co.has not hedged these positions.  The SF and DK are highly correlated in their movements against the dollar.  If the dollar weakens,then Magent Co.will: