Question 1

When a firm is unprofitable it generates a ________ that allows it to offset the losses that were incurred against future income.

Accepted Answer

A)  tax credit 
B)  itemized deductions 
C)  tax-loss carry-forward 
D)  a write-down 
A)  tax credit 
B)  itemized deductions 
C)  tax-loss carry-forward 
D)  a write-down C

Question 2

How can hedging increase the value of a firm?

Accepted Answer

A)  by reducing its liabilities 
B)  by reducing its future income taxes 
C)  by increasing its interest expense 
D)  by increasing its headquarter expense 
A)  by reducing its liabilities 
B)  by reducing its future income taxes 
C)  by increasing its interest expense 
D)  by increasing its headquarter expense B

Question 3

If the tax code is convex and the forward rate equals the expected future spot rate,why would a firm prefer to pay taxes on the hedged value of a foreign currency cash flow rather than wait to pay the taxes on the realized foreign currency cash flow?

Accepted Answer

In the presence of a convex tax code and if the forward rate equals the expected future spot rate,a firm would prefer to pay tax on its expected income with certainty rather than paying its expected tax by taking the probability weighted average of the taxes on possible incomes in the uncertain future states of the world.This is because hedging allows the firm to shift income across different states of the world.Increasing income in states with losses avoids the low subsidy rates and thus hedging reduces expected taxes.This increases the firm's value.

Question 4

Accountants treat many hedges as ________.

Accepted Answer

A)  accrued expenses 
B)  deferred income 
C)  near liquid assets 
D)  off-balance sheet items 
A)  accrued expenses 
B)  deferred income 
C)  near liquid assets 
D)  off-balance sheet items

Question 5

Why would a firm ever forgo a positive NPV project? How can hedging help prevent this situation from arising?

Accepted Answer

If the firm has debt in its capital stru

Question 6

Modigliani and Miller argued that a corporation's financial policies,such as hedging foreign exchange risk,________ unless they lowered the firm's taxes,affected its investment decisions,or could be done more cheaply than individual investors' transactions could be done.

Accepted Answer

A)  do not change the value of the firm's assets 
B)  always change the value of the firm's assets 
C)  were difficult to assess 
D)  were relevant to a firm's dividend policy 
A)  do not change the value of the firm's assets 
B)  always change the value of the firm's assets 
C)  were difficult to assess 
D)  were relevant to a firm's dividend policy

Question 7

What does it mean when a tax code is convex?

Accepted Answer

A)  It is a flat tax and does not vary as taxable income varies. 
B)  It is regressive and taxes lower incomes more. 
C)  Is proportional and the rate always taxes at proportional income equivalents. 
D)  It imposes a higher rate on higher incomes and a lower rate on lower incomes. 
A)  It is a flat tax and does not vary as taxable income varies. 
B)  It is regressive and taxes lower incomes more. 
C)  Is proportional and the rate always taxes at proportional income equivalents. 
D)  It imposes a higher rate on higher incomes and a lower rate on lower incomes.

Question 8

Hedging reduces the amount of ________ in earnings data that is not due to actions of the managers.

Accepted Answer

A)  information 
B)  certainty 
C)  "noise" 
D)  investor interest 
A)  information 
B)  certainty 
C)  "noise" 
D)  investor interest

Question 9

Because only ________ tend to get reported,gathering information that reports the trends in hedging activity must be done in other ways.

Accepted Answer

A)  income statements and balance sheets 
B)  cash transactions 
C)  cash and credit transactions 
D)  local currency expenses 
A)  income statements and balance sheets 
B)  cash transactions 
C)  cash and credit transactions 
D)  local currency expenses

Question 10

It is appropriate for the costs of hedging to be borne by the ________ department of the multinational corporation.

Accepted Answer

A)  marketing 
B)  treasury 
C)  legal 
D)  shipping 
A)  marketing 
B)  treasury 
C)  legal 
D)  shipping

Question 11

What are the gains from hedging foreign exchange risk?

Accepted Answer

An entrepreneur would find it desirable

Question 12

You work for a company where the CFO thinks that the value of the firm's assets fluctuate widely with the euro-dollar exchange rate does not want to hedge the firm's exchange rate risk because he thinks it is impossible.How can you convince him to hedge?

Accepted Answer

In order to hedge the euro-dollar exchan

Question 13

________ is the use of derivative securities to take positions in financial markets that offset the underlying sources of risk that arise in a company's normal course of business.

Accepted Answer

A)  Hedging 
B)  Risk management 
C)  Asset securitization 
D)  Option premium 
A)  Hedging 
B)  Risk management 
C)  Asset securitization 
D)  Option premium

Question 14

What does hedging have to do with expected taxes?

Accepted Answer

A)  It creates a tax-loss carry-forward. 
B)  It separates production costs from headquarters' costs. 
C)  It provides the firm with additional expenses reducing taxable income. 
D)  It allows the firm to shift income across different tax jurisdictions in the world. 
A)  It creates a tax-loss carry-forward. 
B)  It separates production costs from headquarters' costs. 
C)  It provides the firm with additional expenses reducing taxable income. 
D)  It allows the firm to shift income across different tax jurisdictions in the world.

Question 15

Because much of the equity value of a firm ________,hedging the foreign exchange risk is difficult.

Accepted Answer

A)  depends on the indefinite future 
B)  is affected by nominal exchange rate risk 
C)  is derived from current and past cash flows only 
D)  must be discounted a finite period of times 
A)  depends on the indefinite future 
B)  is affected by nominal exchange rate risk 
C)  is derived from current and past cash flows only 
D)  must be discounted a finite period of times

Question 16

When a firm's pretax income is more volatile,

Accepted Answer

A)  the benefits of hedging currency risk are smaller. 
B)  the benefits of hedging currency risk are greater. 
C)  hedging will produce mixed benefits to the firm. 
D)  it is not possible to determines whether any benefits are greater. 
A)  the benefits of hedging currency risk are smaller. 
B)  the benefits of hedging currency risk are greater. 
C)  hedging will produce mixed benefits to the firm. 
D)  it is not possible to determines whether any benefits are greater.

Question 17

If Alpha International Inc.has debt in its capital structure,it may forego a ________ project because too much of the increase in the firm's value may accrue to the creditors rather than the stockholders.

Accepted Answer

A)  negative NPV 
B)  zero NPV 
C)  positive NPV 
D)  negative rate of return 
A)  negative NPV 
B)  zero NPV 
C)  positive NPV 
D)  negative rate of return

Question 18

What is the name of the accounting convention that allows a firm to offset the losses that were incurred against future income rather than receive a refund of taxes paid?

Accepted Answer

A)  tax credit 
B)  itemized deductions 
C)  tax-loss carry-forward 
D)  a write-down 
A)  tax credit 
B)  itemized deductions 
C)  tax-loss carry-forward 
D)  a write-down

Question 19

________ are typically larger in the forward market than in the spot market for currency.

Accepted Answer

A)  Contract sizes 
B)  Bank fees 
C)  The bid-ask spreads 
D)  Employee costs 
A)  Contract sizes 
B)  Bank fees 
C)  The bid-ask spreads 
D)  Employee costs

Question 20

According to some research,firms with higher dividend payouts are more like to

Accepted Answer

A)  generate a tax-loss carry-forward. 
B)  incur financial distress. 
C)  hedge. 
D)  under-report their hedging activities. 
A)  generate a tax-loss carry-forward. 
B)  incur financial distress. 
C)  hedge. 
D)  under-report their hedging activities.

Exam 17: Risk Management and the Foreign Currency Hedging Decision

When a firm is unprofitable it generates a ________ that allows it to offset the losses that were incurred against future income.

How can hedging increase the value of a firm?

If the tax code is convex and the forward rate equals the expected future spot rate,why would a firm prefer to pay taxes on the hedged value of a foreign currency cash flow rather than wait to pay the taxes on the realized foreign currency cash flow?

Accountants treat many hedges as ________.

Why would a firm ever forgo a positive NPV project? How can hedging help prevent this situation from arising?

Modigliani and Miller argued that a corporation's financial policies,such as hedging foreign exchange risk,________ unless they lowered the firm's taxes,affected its investment decisions,or could be done more cheaply than individual investors' transactions could be done.

What does it mean when a tax code is convex?

Hedging reduces the amount of ________ in earnings data that is not due to actions of the managers.

Because only ________ tend to get reported,gathering information that reports the trends in hedging activity must be done in other ways.

It is appropriate for the costs of hedging to be borne by the ________ department of the multinational corporation.

What are the gains from hedging foreign exchange risk?

You work for a company where the CFO thinks that the value of the firm's assets fluctuate widely with the euro-dollar exchange rate does not want to hedge the firm's exchange rate risk because he thinks it is impossible.How can you convince him to hedge?

________ is the use of derivative securities to take positions in financial markets that offset the underlying sources of risk that arise in a company's normal course of business.

What does hedging have to do with expected taxes?

Because much of the equity value of a firm ________,hedging the foreign exchange risk is difficult.

When a firm's pretax income is more volatile,

If Alpha International Inc.has debt in its capital structure,it may forego a ________ project because too much of the increase in the firm's value may accrue to the creditors rather than the stockholders.

What is the name of the accounting convention that allows a firm to offset the losses that were incurred against future income rather than receive a refund of taxes paid?

________ are typically larger in the forward market than in the spot market for currency.

According to some research,firms with higher dividend payouts are more like to

Globalization and the Multinational Corporation

The Foreign Exchange Market

Forward Markets and Transaction Exchange Risk

The Balance of Payments

Exchange Rate Systems

Interest Rate Parity

Speculation and Risk in the Foreign Exchange Market

Purchasing Power Parity and Real Exchange Rates

Measuring and Managing Real Exchange Risk

Exchange Rate Determination and Forecasting

International Debt Financing

International Equity Financing

International Capital Market Equilibrium

Country and Political Risk

International Capital Budgeting

Additional Topics in International Capital Budgeting

Financing International Trade

Managing Net Working Capital

Foreign Currency Futures and Options

Interest Rates and Foreign Currency Swaps

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