Question 1

Transaction exposure and operating exposure differ in that transaction exposure:

Accepted Answer

A)  derives from a company's foreign-currency-denominated cash flows, and operating exposure applies to the impact of exchange rate volatility on the value of the assets and liabilities of a company's foreign operations. 
B)  derives from a company's foreign-currency-denominated cash flows, and operating exposure applies to the impact of exchange rate volatility on future cash flows. 
C)  derives from a company's foreign-currency-denominated cash flows, and operating exposure applies to the impact of exchange rate volatility on foreign operations. 
D)  applies to the impact of exchange rate volatility on future cash flows, and operating exposure applies to the impact of exchange rate volatility on foreign operations. 
A)  derives from a company's foreign-currency-denominated cash flows, and operating exposure applies to the impact of exchange rate volatility on the value of the assets and liabilities of a company's foreign operations. 
B)  derives from a company's foreign-currency-denominated cash flows, and operating exposure applies to the impact of exchange rate volatility on future cash flows. 
C)  derives from a company's foreign-currency-denominated cash flows, and operating exposure applies to the impact of exchange rate volatility on foreign operations. 
D)  applies to the impact of exchange rate volatility on future cash flows, and operating exposure applies to the impact of exchange rate volatility on foreign operations. B

Question 2

Consider these five statements:
i.If an Australian-based company has a USD 1 million payable on 1 July next year and a USD 1 million receivable due on 1 August,the company has a perfect natural hedge.
ii.An Australian exporter with a transaction denominated in Singapore dollars (SGD)is exposed to downside risk if the AUD appreciates.
iii.An exposure in a currency with a high standard deviation against the AUD entails a greater degree of risk than does a similarly sized exposure in a currency that has a relatively low standard deviation.
iv.If an Australian-based company has net exposures in a range of currencies,each exposure should be not hedged because each of them involves the same degree of risk.
v.If an Australian company imports components from Italy,and at the same time exports goods to Germany,with both contracts under a euro-denominated contract and dated 31 July next year,the company has no FX exposure.
How many of these statements are true and how many are false?

Accepted Answer

A)  4 statements are true and 1 is false 
B)  3 statements are true and 2 are false 
C)  2 statements are true and 3 are false 
D)  1 statement is true and 4 are false 
A)  4 statements are true and 1 is false 
B)  3 statements are true and 2 are false 
C)  2 statements are true and 3 are false 
D)  1 statement is true and 4 are false B

Question 3

If a company has overseas assets and at a future date must represent these assets on its balance sheet,it faces ______ when doing so.

Accepted Answer

A)  transaction exposure 
B)  economic exposure 
C)  operating exposure 
D)  translation exposure 
A)  transaction exposure 
B)  economic exposure 
C)  operating exposure 
D)  translation exposure D

Question 4

The purpose of hedging by a company is to:

Accepted Answer

A)  maximise cash flows and profits. 
B)  minimise the variability of expected cash flows. 
C)  decrease the uncertainty of reported cash flows. 
D)  increase the expected cash flows. 
A)  maximise cash flows and profits. 
B)  minimise the variability of expected cash flows. 
C)  decrease the uncertainty of reported cash flows. 
D)  increase the expected cash flows.

Question 5

Which of the following does NOT relate to an operating exposure for a company with a large foreign subsidiary in Japan?

Accepted Answer

A)  Payment of its Japanese employees 
B)  Borrowing yen from a Japanese bank 
C)  The incorporation of a Japanese subsidiary onto the Australian parent company balance sheet 
D)  Payment of its day-to-day operations in Japan 
A)  Payment of its Japanese employees 
B)  Borrowing yen from a Japanese bank 
C)  The incorporation of a Japanese subsidiary onto the Australian parent company balance sheet 
D)  Payment of its day-to-day operations in Japan

Question 6

An Australian company that is exposed to FX risk as the result of having a USD foreign currency payable due in 3 months can enter into:

Accepted Answer

A)  a 3 month forward exchange contract to sell USD forward. 
B)  a 3 month forward exchange contract to sell AUD forward. 
C)  a 3 month futures contract to sell USD. 
D)  a 3 month currency swap to sell USD and buy AUD. 
A)  a 3 month forward exchange contract to sell USD forward. 
B)  a 3 month forward exchange contract to sell AUD forward. 
C)  a 3 month futures contract to sell USD. 
D)  a 3 month currency swap to sell USD and buy AUD.

Question 7

A centralised FX operation is where:

Accepted Answer

A)  the control of Treasury policy development and FX trading is spread equally between the directors of the company. 
B)  Treasury policy and FX trading is spread between the divisions of the company. 
C)  Treasury policy development and FX trading is associated with several regional offices. 
D)  for a company all FX transactions occur in one single location. 
A)  the control of Treasury policy development and FX trading is spread equally between the directors of the company. 
B)  Treasury policy and FX trading is spread between the divisions of the company. 
C)  Treasury policy development and FX trading is associated with several regional offices. 
D)  for a company all FX transactions occur in one single location.

Question 8

If an Australian company has a GBP 1 million receivable,due in three months,and takes out a forward exchange contract to hedge,it enters into a contract to buy GBP 1 million in three months' time.

Accepted Answer

A) True 
 B)False

Question 9

For a large multinational company the FX dealers:

Accepted Answer

A)  are generally located in the FX dealing room. 
B)  must not be allowed to carry out back office tasks of confirmation, settlements or reconciliation. 
C)  must take into account the foreign currency limit that they are authorised to trade in. 
D)  all the given choices are correct. 
A)  are generally located in the FX dealing room. 
B)  must not be allowed to carry out back office tasks of confirmation, settlements or reconciliation. 
C)  must take into account the foreign currency limit that they are authorised to trade in. 
D)  all the given choices are correct.

Question 10

Transaction exposure:

Accepted Answer

A)  measures the extent to which foreign exchange volatility may affect a firm's future ongoing revenues and costs. 
B)  measures the effects of FX changes on the balance sheet of the firm. 
C)  refers to the extent to which the value of the firm's cash flows may be affected by changes in the exchange rate. 
D)  tries to measure the impact of unexpected exchange rate fluctuations on the net present value of the firm's future cash flows. 
A)  measures the extent to which foreign exchange volatility may affect a firm's future ongoing revenues and costs. 
B)  measures the effects of FX changes on the balance sheet of the firm. 
C)  refers to the extent to which the value of the firm's cash flows may be affected by changes in the exchange rate. 
D)  tries to measure the impact of unexpected exchange rate fluctuations on the net present value of the firm's future cash flows.

Question 11

Companies that compete in an international marketplace may be faced with three types of risk owing to foreign exchange.These are:

Accepted Answer

A)  specific, translation and transaction risk. 
B)  translation, transaction and economic risk. 
C)  accounting, transaction and translation risk. 
D)  accounting, specific and transaction risk. 
A)  specific, translation and transaction risk. 
B)  translation, transaction and economic risk. 
C)  accounting, transaction and translation risk. 
D)  accounting, specific and transaction risk.

Question 12

A company is reviewing the function of foreign exchange within its treasury division.Which one of the following is NOT one of the 'controls' the company should have in place for the FX function?

Accepted Answer

A)  There should be specified monetary limits for single transactions. 
B)  Authorisations should be required for FX products. 
C)  The tasks of dealing, back office, technology support, administration and audit should be segregated. 
D)  The net value of outstanding FX buys and sell transactions yet to be settled is called an exception report. 
A)  There should be specified monetary limits for single transactions. 
B)  Authorisations should be required for FX products. 
C)  The tasks of dealing, back office, technology support, administration and audit should be segregated. 
D)  The net value of outstanding FX buys and sell transactions yet to be settled is called an exception report.

Question 13

In order to have specific policies in relation to FX management which part of the company needs to establish FX policies?

Accepted Answer

A)  Accounting and reporting division 
B)  Management and audit division 
C)  The manager of the treasury division 
D)  The board of directors 
A)  Accounting and reporting division 
B)  Management and audit division 
C)  The manager of the treasury division 
D)  The board of directors

Question 14

Which of the following about transaction exposure is NOT correct?

Accepted Answer

A)  An Australian company that exports to Japan faces transaction exposure for its accounts receivable. 
B)  If an Australian company exports to the USA but imports other USA goods for the same value, then it has a natural hedge if the two payment dates are the same. 
C)  If an Australian company has exposures in two currencies with correlation coefficient of 0.96 then the company has a natural hedge. 
D)  A firm needs to calculate the net amount of cash inflows and outflows denominated in different currencies, based on the timing of cashflows. 
A)  An Australian company that exports to Japan faces transaction exposure for its accounts receivable. 
B)  If an Australian company exports to the USA but imports other USA goods for the same value, then it has a natural hedge if the two payment dates are the same. 
C)  If an Australian company has exposures in two currencies with correlation coefficient of 0.96 then the company has a natural hedge. 
D)  A firm needs to calculate the net amount of cash inflows and outflows denominated in different currencies, based on the timing of cashflows.

Question 15

In relation to potential FX exposures,historical data suggests to manage FX exposures:

Accepted Answer

A)  all importers, exporters, lenders and borrowers in capital markets tend to use currency futures contracts and cross-currency swaps. 
B)  in commercial trade transactions importers and exporters use currency futures contracts and in capital market transactions lenders and borrowers use forward exchange contracts. 
C)  in commercial trade transactions importers and exporters typically use forward exchange contracts and currency options while in capital markets transactions lenders and borrowers tend to use currency futures contracts and cross-currency swaps. 
D)  All importers and exporters in trade as well as lenders and borrowers in capital market transactions tend to use forward exchange contracts and currency options. 
A)  all importers, exporters, lenders and borrowers in capital markets tend to use currency futures contracts and cross-currency swaps. 
B)  in commercial trade transactions importers and exporters use currency futures contracts and in capital market transactions lenders and borrowers use forward exchange contracts. 
C)  in commercial trade transactions importers and exporters typically use forward exchange contracts and currency options while in capital markets transactions lenders and borrowers tend to use currency futures contracts and cross-currency swaps. 
D)  All importers and exporters in trade as well as lenders and borrowers in capital market transactions tend to use forward exchange contracts and currency options.

Question 16

In examining its need to cover its exposures to foreign exchange risk,a company obtains current data on the correlation between various currencies to which it is exposed.The company determines that its main currency exposures are to the USD and the JPY.These currencies have a correlation coefficient of +0.96.Based on the spot rate for each of the currencies,the company expects USD cash inflows equivalent to AUD 500 000,and JPY cash inflows equivalent to AUD 495 000.Which of the following statements is most correct?

Accepted Answer

A)  High positive correlation between USD and JPY (hedge risk exposure) 
B)  High positive correlation between USD and JPY (little need to hedge risk) exposure 
C)  High positive correlation between USD and AUD (hedge risk exposure) 
D)  Low negative correlation between USD and AUD (no need to hedge risk exposure) 
A)  High positive correlation between USD and JPY (hedge risk exposure) 
B)  High positive correlation between USD and JPY (little need to hedge risk) exposure 
C)  High positive correlation between USD and AUD (hedge risk exposure) 
D)  Low negative correlation between USD and AUD (no need to hedge risk exposure)

Question 17

Transaction exposure measures the changes in the value of contractually binding outstanding foreign-currency obligations:

Accepted Answer

A)  acquired after exchange rate changes. 
B)  acquired before exchange rate changes. 
C)  realised before the outstanding obligation is settled. 
D)  that must be settled before economic exposure is established. 
A)  acquired after exchange rate changes. 
B)  acquired before exchange rate changes. 
C)  realised before the outstanding obligation is settled. 
D)  that must be settled before economic exposure is established.

Question 18

When a foreign subsidiary's assets are _______ than its liabilities,if the foreign currency value appreciates for the country in which the foreign subsidiary operates,_______ will occur.

Accepted Answer

A)  greater; currency exchange gains 
B)  greater; currency exchange losses 
C)  less; nothing 
D)  greater; nothing 
A)  greater; currency exchange gains 
B)  greater; currency exchange losses 
C)  less; nothing 
D)  greater; nothing

Question 19

Operating FX exposure measures the extent to which exchange rate volatility will affect future ongoing revenues and costs.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following are commonly used by companies to manage foreign exchange risk?

Accepted Answer

A)  Money market hedges 
B)  Foreign currency hedges 
C)  Internal hedges 
D)  All of the given choices 
A)  Money market hedges 
B)  Foreign currency hedges 
C)  Internal hedges 
D)  All of the given choices

Transaction exposure and operating exposure differ in that transaction exposure:

If a company has overseas assets and at a future date must represent these assets on its balance sheet,it faces ______ when doing so.

The purpose of hedging by a company is to:

Which of the following does NOT relate to an operating exposure for a company with a large foreign subsidiary in Japan?

An Australian company that is exposed to FX risk as the result of having a USD foreign currency payable due in 3 months can enter into:

A centralised FX operation is where:

If an Australian company has a GBP 1 million receivable,due in three months,and takes out a forward exchange contract to hedge,it enters into a contract to buy GBP 1 million in three months' time.

For a large multinational company the FX dealers:

Transaction exposure:

Companies that compete in an international marketplace may be faced with three types of risk owing to foreign exchange.These are:

A company is reviewing the function of foreign exchange within its treasury division.Which one of the following is NOT one of the 'controls' the company should have in place for the FX function?

In order to have specific policies in relation to FX management which part of the company needs to establish FX policies?

Which of the following about transaction exposure is NOT correct?

In relation to potential FX exposures,historical data suggests to manage FX exposures:

Transaction exposure measures the changes in the value of contractually binding outstanding foreign-currency obligations:

When a foreign subsidiary's assets are _ than its liabilities,if the foreign currency value appreciates for the country in which the foreign subsidiary operates,_ will occur.

Operating FX exposure measures the extent to which exchange rate volatility will affect future ongoing revenues and costs.

Which of the following are commonly used by companies to manage foreign exchange risk?

A Modern Financial System: An Overview

Commercial Banks

Non-Bank Financial Institutions

The Share Market and the Corporation

Corporations Issuing Equity in the Share Market

Investors in the Share Market

Forecasting Share Price Movements

Mathematics of Finance: An Introduction to Basic Concepts and Calculations

Short-Term Debt

Medium-To-Long-Term Debt

International Debt Markets

Government Debt, monetary Policy and the Payments System

An Introduction to Interest Rate Determination and Forecasting

Interest Rate Risk

Foreign Exchange: The Structure and Operation of the Fx Market

Foreign Exchange: Factors That Influence the Exchange Rate

An Introduction to Risk Management and Derivatives

Future Contracts and Forward Rate Agreements

Options

Interest Rate Swaps, Cross-Currency Swaps and Credit Default

Filters

Exam 17: Foreign Exchange: Risk Identification and Management

Transaction exposure and operating exposure differ in that transaction exposure:

If a company has overseas assets and at a future date must represent these assets on its balance sheet,it faces ______ when doing so.

The purpose of hedging by a company is to:

Which of the following does NOT relate to an operating exposure for a company with a large foreign subsidiary in Japan?

An Australian company that is exposed to FX risk as the result of having a USD foreign currency payable due in 3 months can enter into:

A centralised FX operation is where:

If an Australian company has a GBP 1 million receivable,due in three months,and takes out a forward exchange contract to hedge,it enters into a contract to buy GBP 1 million in three months' time.

For a large multinational company the FX dealers:

Transaction exposure:

Companies that compete in an international marketplace may be faced with three types of risk owing to foreign exchange.These are:

A company is reviewing the function of foreign exchange within its treasury division.Which one of the following is NOT one of the 'controls' the company should have in place for the FX function?

In order to have specific policies in relation to FX management which part of the company needs to establish FX policies?

Which of the following about transaction exposure is NOT correct?

In relation to potential FX exposures,historical data suggests to manage FX exposures:

Transaction exposure measures the changes in the value of contractually binding outstanding foreign-currency obligations:

When a foreign subsidiary's assets are _______ than its liabilities,if the foreign currency value appreciates for the country in which the foreign subsidiary operates,_______ will occur.

Operating FX exposure measures the extent to which exchange rate volatility will affect future ongoing revenues and costs.

Which of the following are commonly used by companies to manage foreign exchange risk?

A Modern Financial System: An Overview

Commercial Banks

Non-Bank Financial Institutions

The Share Market and the Corporation

Corporations Issuing Equity in the Share Market

Investors in the Share Market

Forecasting Share Price Movements

Mathematics of Finance: An Introduction to Basic Concepts and Calculations

Short-Term Debt

Medium-To-Long-Term Debt

International Debt Markets

Government Debt, monetary Policy and the Payments System

An Introduction to Interest Rate Determination and Forecasting

Interest Rate Risk

Foreign Exchange: The Structure and Operation of the Fx Market

Foreign Exchange: Factors That Influence the Exchange Rate

An Introduction to Risk Management and Derivatives

Future Contracts and Forward Rate Agreements

Options

Interest Rate Swaps, Cross-Currency Swaps and Credit Default

Filters

When a foreign subsidiary's assets are _ than its liabilities,if the foreign currency value appreciates for the country in which the foreign subsidiary operates,_ will occur.