Question 1

Hedging cannot provide protection against ________ exchange rate changes.

Accepted Answer

A)  expected 
B)  nominal 
C)  real 
D)  pegged 
A)  expected 
B)  nominal 
C)  real 
D)  pegged A

Question 2

March 1, 1998, Bechtel submits a franc?denominated bid on a project in France. Bechtel will not learn until June 1 whether it has won the contract. What is the most appropriate way for Bechtel to manage the exchange risk on this contract?

Accepted Answer

A)  sell the franc amount of the bid forward for U.S. dollars 
B)  buy French francs forward in the amount of the contract 
C)  buy a put option on francs in the amount of the franc exposure 
D)  sell a call option on francs in the amount of franc exposure 
A)  sell the franc amount of the bid forward for U.S. dollars 
B)  buy French francs forward in the amount of the contract 
C)  buy a put option on francs in the amount of the franc exposure 
D)  sell a call option on francs in the amount of franc exposure C

Question 3

current standard for measuring translation exposure is

Accepted Answer

A)  the current/noncurrent method 
B)  the monetary/nonmonetary method 
C)  FASB 8 
D)  FASB 52 
A)  the current/noncurrent method 
B)  the monetary/nonmonetary method 
C)  FASB 8 
D)  FASB 52 D

Question 4

Translation exposure reflects the exposure of a company's

Accepted Answer

A)  foreign operations to currency movements 
B)  foreign sales to currency movements 
C)  financial statements to currency movements 
D)  cash flows to currency movements 
A)  foreign operations to currency movements 
B)  foreign sales to currency movements 
C)  financial statements to currency movements 
D)  cash flows to currency movements

Question 5

The following information is to be used in answering questions 36?38.
U.S. borrowing rate for 1 year = 9.5%
U.S. deposit rate for 1 year = 8.7%
French borrowing rate for 1 year = 11.3%
French deposit rate for 1 year = 10.2%
French franc spot quote = $0.1763?78
French franc 1?year forward quote = $0.1729?47
-1990, Goodyear had operations in both Germany and the Netherlands. In the past the Dutch guilder and Deutsche mark were highly correlated in their movements against the U.S. dollar. If the Dutch unit has net inflows of guilders and the German unit has net inflows of DM, then Goodyear's combined transaction exposure

Accepted Answer

A)  approximately equals the sum of its guilder and DM exposures 
B)  is less than the sum of its guilder and DM exposures because the currencies are highly correlated 
C)  is less than the sum of its guilder and DM exposures because of diversification between the company's subsidiaries 
D)  is not significant due to the highly correlated nature of the two currencies 
A)  approximately equals the sum of its guilder and DM exposures 
B)  is less than the sum of its guilder and DM exposures because the currencies are highly correlated 
C)  is less than the sum of its guilder and DM exposures because of diversification between the company's subsidiaries 
D)  is not significant due to the highly correlated nature of the two currencies

Question 6

The following information is to be used in answering questions 16?17.
In 1995, Ajax Manufacturing's German subsidiary has the following balance sheet:
 $$\begin{array}{l}
\begin{array} { l l l l } 
\text { Cash, rrarketable } & \text { DM 250,000 } & \text { Current liabilities } & \text { DM 750,000 } \
\text { securities } & 1,000,000 & \text { Long-tern debt } & 3,400,000 \
\text { Accourits receivable } & 2,700,000 & \text { Equity } & 4,900,000 \
\text { Irventory fat rrarket. } & 5,100,000 & & \
\text { Fixed Assets } & -----7 &\text{total liabilities} & -----\
& \text { DM } 9,050,000 & \text { plus equity } & \text { DM } 9,050,000
\end{array}\
\text { Total assets }
\end{array}$$ Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the temporal method, what is Ajax's translation gain (loss).?

Accepted Answer

A)  a gain of $294,000 
B)  a gain of $192,000 
C)  a loss of $174,000 
D)  a loss of $12,000 
A)  a gain of $294,000 
B)  a gain of $192,000 
C)  a loss of $174,000 
D)  a loss of $12,000

Question 7

Computer has a £1 million receivable that it expects to collect in one year. Suppose the interest rate on pounds is 15%. How could Dell protect this receivable using a money market hedge?

Accepted Answer

A)  borrow £1 million pounds today 
B)  lend £1 million pounds today 
C)  borrow £869,565 pounds today 
D)  lend £986,754 pounds today 
A)  borrow £1 million pounds today 
B)  lend £1 million pounds today 
C)  borrow £869,565 pounds today 
D)  lend £986,754 pounds today

Question 8

The following information is to be used in answering questions 16?17.
In 1995, Ajax Manufacturing's German subsidiary has the following balance sheet:
 $$\begin{array}{l}
\begin{array} { l l l l } 
\text { Cash, rrarketable } & \text { DM 250,000 } & \text { Current liabilities } & \text { DM 750,000 } \
\text { securities } & 1,000,000 & \text { Long-tern debt } & 3,400,000 \
\text { Accourits receivable } & 2,700,000 & \text { Equity } & 4,900,000 \
\text { Irventory fat rrarket. } & 5,100,000 & & \
\text { Fixed Assets } & -----7 &\text{total liabilities} & -----\
& \text { DM } 9,050,000 & \text { plus equity } & \text { DM } 9,050,000
\end{array}\
\text { Total assets }
\end{array}$$ Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the monetary/non-monetary method, what is Ajax's translation gain (loss)?

Accepted Answer

A)  a gain of $294,000 
B)  a gain of $192,000 
C)  a loss of $174,000 
D)  a loss of $12,000 
A)  a gain of $294,000 
B)  a gain of $192,000 
C)  a loss of $174,000 
D)  a loss of $12,000

Question 9

Under FASB 52, most financial statements must be translated using the

Accepted Answer

A)  monetary/nonmonetary method 
B)  current/noncurrent method 
C)  current rate method 
D)  temporal method 
A)  monetary/nonmonetary method 
B)  current/noncurrent method 
C)  current rate method 
D)  temporal method

Question 10

The following information is to be used in answering questions 36?38.
U.S. borrowing rate for 1 year = 9.5%
U.S. deposit rate for 1 year = 8.7%
French borrowing rate for 1 year = 11.3%
French deposit rate for 1 year = 10.2%
French franc spot quote = $0.1763?78
French franc 1?year forward quote = $0.1729?47
-Suppose Alcoa in 1995 had a payable of FF 1 million due in one year. Alcoa's cost of the payable using a money market hedge is _______ and its cost using a forward market hedge is _______.

Accepted Answer

A)  $173,900; $177,470 
B)  $174,925; $176,300 
C)  $176,671; $172,900 
D)  $178,937; $174,700 
A)  $173,900; $177,470 
B)  $174,925; $176,300 
C)  $176,671; $172,900 
D)  $178,937; $174,700

Question 11

Suppose PepsiCo hedges a ¥1 billion dividend it expects to receive from its Japanese subsidiary in 90 days with a forward contract. The current spot rate is ¥150/$1 and the 90?day forward rate is ¥149/$If the spot rate in 90 days is ¥154/$, how much has this forward market hedge cost PepsiCo?

Accepted Answer

A)  $173,160 
B)  $44,743 
C)  Pepsi gains $173,160 from the forward contract 
D)  Pepsi gains $217,903 from the forward contract 
A)  $173,160 
B)  $44,743 
C)  Pepsi gains $173,160 from the forward contract 
D)  Pepsi gains $217,903 from the forward contract

Question 12

major difference between the temporal method and the monetary/nonmonetary method is that

Accepted Answer

A)  under the monetary/nonmonetary method, long?term debt is translated at the historical rate, whereas under the temporal method, long?term debt is translated at the current rate 
B)  under the monetary/nonmonetary method, inventory is always translated at the historical rate, whereas under the temporal method, inventory may be translated at the current rate if the inventory is shown on the balance sheet at market values 
C)  under the monetary/nonmonetary method, fixed assets are translated at the historical rate, whereas under the temporal method, fixed assets may be translated at the current rate 
D)  under the monetary/nonmonetary method, accounts receivable are always translated at the historical rate, whereas under the temporal method, receivables may be translated at the current rate 
A)  under the monetary/nonmonetary method, long?term debt is translated at the historical rate, whereas under the temporal method, long?term debt is translated at the current rate 
B)  under the monetary/nonmonetary method, inventory is always translated at the historical rate, whereas under the temporal method, inventory may be translated at the current rate if the inventory is shown on the balance sheet at market values 
C)  under the monetary/nonmonetary method, fixed assets are translated at the historical rate, whereas under the temporal method, fixed assets may be translated at the current rate 
D)  under the monetary/nonmonetary method, accounts receivable are always translated at the historical rate, whereas under the temporal method, receivables may be translated at the current rate

Question 13

The following information is to be used in answering questions 36?38.
U.S. borrowing rate for 1 year = 9.5%
U.S. deposit rate for 1 year = 8.7%
French borrowing rate for 1 year = 11.3%
French deposit rate for 1 year = 10.2%
French franc spot quote = $0.1763?78
French franc 1?year forward quote = $0.1729?47
-value can Alcoa lock in for a receivable of FF 3 million due in one year if it executes a money market hedge today?

Accepted Answer

A)  $525,540 
B)  $516,545 
C)  $530,012 
D)  $520,940 
A)  $525,540 
B)  $516,545 
C)  $530,012 
D)  $520,940

Question 14

___________ a certain currency exposure means establishing an offsetting currency position so that the gain or loss from the exposure on the original currency is exactly offset buy the gain or loss from the currency hedge.

Accepted Answer

A)  Arbitraging 
B)  Cross-hedging 
C)  Hedging 
D)  Risk shifting 
A)  Arbitraging 
B)  Cross-hedging 
C)  Hedging 
D)  Risk shifting

Question 15

____________ exposure results from the possibility of incurring a gain or loss related to a sale or purchase already entered into and denominated in another currency.

Accepted Answer

A)  translation 
B)  transaction 
C)  operating 
D)  accounting 
A)  translation 
B)  transaction 
C)  operating 
D)  accounting

Question 16

argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through ________.

Accepted Answer

A)  risk shifting 
B)  risk sharing 
C)  offshore banking 
D)  exposure netting 
A)  risk shifting 
B)  risk sharing 
C)  offshore banking 
D)  exposure netting

Question 17

1993, Ford simultaneously borrows Spanish pesetas at 13% and invests dollars at 10%, both for one year. At the time Ford enters into these transactions, the spot rate for the peseta is $0.09If the spot rate is peseta 1 = $0.087 in one year, what is the cost to Ford of this money market hedge?

Accepted Answer

A)  2.0% 
B)  3.8% 
C)  1.3% 
D)  Ford has a 6.5% gain, not a cost 
A)  2.0% 
B)  3.8% 
C)  1.3% 
D)  Ford has a 6.5% gain, not a cost

Question 18

basic hedging strategy involves

Accepted Answer

A)  reducing hard currency assets and soft currency liabilities 
B)  increasing hard currency liabilities and soft currency assets 
C)  reducing soft currency assets and hard currency liabilities 
D)  converting soft currencies to hard currencies and lending hard currencies 
A)  reducing hard currency assets and soft currency liabilities 
B)  increasing hard currency liabilities and soft currency assets 
C)  reducing soft currency assets and hard currency liabilities 
D)  converting soft currencies to hard currencies and lending hard currencies

Question 19

Firms that attempt to reduce risk and beat the market simultaneously may end up with

Accepted Answer

A)  more risk, not less 
B)  less risk 
C)  a profit as well as reduced risk 
D)  a loss as well as reduced risk 
A)  more risk, not less 
B)  less risk 
C)  a profit as well as reduced risk 
D)  a loss as well as reduced risk

Question 20

Which one of the following would NOT be a suggested element for an effective exposure management strategy?

Accepted Answer

A)  determine the types of exposure to be monitored 
B)  formulate corporate objectives 
C)  ensure that the corporate objectives a consistent with maximizing shareholder value 
D)  avoid the use of forward contracts where possible 
A)  determine the types of exposure to be monitored 
B)  formulate corporate objectives 
C)  ensure that the corporate objectives a consistent with maximizing shareholder value 
D)  avoid the use of forward contracts where possible

Hedging cannot provide protection against ________ exchange rate changes.

March 1, 1998, Bechtel submits a franc?denominated bid on a project in France. Bechtel will not learn until June 1 whether it has won the contract. What is the most appropriate way for Bechtel to manage the exchange risk on this contract?

current standard for measuring translation exposure is

Translation exposure reflects the exposure of a company's

Computer has a £1 million receivable that it expects to collect in one year. Suppose the interest rate on pounds is 15%. How could Dell protect this receivable using a money market hedge?

Under FASB 52, most financial statements must be translated using the

Suppose PepsiCo hedges a ¥1 billion dividend it expects to receive from its Japanese subsidiary in 90 days with a forward contract. The current spot rate is ¥150/$1 and the 90?day forward rate is ¥149/$If the spot rate in 90 days is ¥154/$, how much has this forward market hedge cost PepsiCo?

major difference between the temporal method and the monetary/nonmonetary method is that

___________ a certain currency exposure means establishing an offsetting currency position so that the gain or loss from the exposure on the original currency is exactly offset buy the gain or loss from the currency hedge.

____________ exposure results from the possibility of incurring a gain or loss related to a sale or purchase already entered into and denominated in another currency.

argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through ________.

1993, Ford simultaneously borrows Spanish pesetas at 13% and invests dollars at 10%, both for one year. At the time Ford enters into these transactions, the spot rate for the peseta is $0.09If the spot rate is peseta 1 = $0.087 in one year, what is the cost to Ford of this money market hedge?

basic hedging strategy involves

Firms that attempt to reduce risk and beat the market simultaneously may end up with

Which one of the following would NOT be a suggested element for an effective exposure management strategy?

Introduction: Multinational Enterpriseand Multinational Financial Management

The Determination of Exchange Rates

The International Monetary System

Parity Conditions in International Finance and Currency Forecasting

The Balance of Payments and International Economic Linkages

Country Risk Anaylsis

The Foreign Exchange Markets

Currency Futures and Options Markets

Swaps and Interest Rate Derivatives

Measuring and Managing Economic Exposure

International Financing and National Capital Market

The Euromarkets

The Cost of Capital for Foreign Investment

International Portfolio Investment

Corporate Strategy and Foreign Direct Investment

Capital Budgeting for the Multinational Corporation

Financing Foreign Trade

Current Asset Management and Short Team Financing

Managing the Multinational Financial System

Filters

Exam 10: Measuring and Managing Translation and Transaction Exposure

Hedging cannot provide protection against ________ exchange rate changes.

March 1, 1998, Bechtel submits a franc?denominated bid on a project in France. Bechtel will not learn until June 1 whether it has won the contract. What is the most appropriate way for Bechtel to manage the exchange risk on this contract?

current standard for measuring translation exposure is

Translation exposure reflects the exposure of a company's

Computer has a £1 million receivable that it expects to collect in one year. Suppose the interest rate on pounds is 15%. How could Dell protect this receivable using a money market hedge?

Under FASB 52, most financial statements must be translated using the

Suppose PepsiCo hedges a ¥1 billion dividend it expects to receive from its Japanese subsidiary in 90 days with a forward contract. The current spot rate is ¥150/$1 and the 90?day forward rate is ¥149/$If the spot rate in 90 days is ¥154/$, how much has this forward market hedge cost PepsiCo?

major difference between the temporal method and the monetary/nonmonetary method is that

___________ a certain currency exposure means establishing an offsetting currency position so that the gain or loss from the exposure on the original currency is exactly offset buy the gain or loss from the currency hedge.

____________ exposure results from the possibility of incurring a gain or loss related to a sale or purchase already entered into and denominated in another currency.

argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through ________.

1993, Ford simultaneously borrows Spanish pesetas at 13% and invests dollars at 10%, both for one year. At the time Ford enters into these transactions, the spot rate for the peseta is $0.09If the spot rate is peseta 1 = $0.087 in one year, what is the cost to Ford of this money market hedge?

basic hedging strategy involves

Firms that attempt to reduce risk and beat the market simultaneously may end up with

Which one of the following would NOT be a suggested element for an effective exposure management strategy?

Introduction: Multinational Enterpriseand Multinational Financial Management

The Determination of Exchange Rates

The International Monetary System

Parity Conditions in International Finance and Currency Forecasting

The Balance of Payments and International Economic Linkages

Country Risk Anaylsis

The Foreign Exchange Markets

Currency Futures and Options Markets

Swaps and Interest Rate Derivatives

Measuring and Managing Economic Exposure

International Financing and National Capital Market

The Euromarkets

The Cost of Capital for Foreign Investment

International Portfolio Investment

Corporate Strategy and Foreign Direct Investment

Capital Budgeting for the Multinational Corporation

Financing Foreign Trade

Current Asset Management and Short Team Financing

Managing the Multinational Financial System

Filters