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.

Which of the following is NOT an example of an operating cash flow?

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.

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 would NRI owe in U.S. dollars?

When disequilibria in international markets occur, management can take advantage by:

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

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 ________.

The higher the price elasticity of demand, the higher the degree of pass-through.

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

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

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?

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.

Which of the following is NOT an example of a financial cash flow?

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

Currency swaps are exclusively for periods of time under one year.

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).

Diversifying the financing base means diversifying sales, location of production facilities, and raw material sources.

Swap agreements are treated as off-balance sheet transactions via U.S. accounting methods.