Question 1

According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.

Accepted Answer

A)  are; are not 
B)  are; are 
C)  are not; are not 
D)  are not; are 
A)  are; are not 
B)  are; are 
C)  are not; are not 
D)  are not; are

Question 2

Which of the following is not true regarding currency correlations?

Accepted Answer

A)  Two highly positively correlated currencies act almost as if they are the same currency. 
B)  If two inflow currencies are highly positively correlated transaction exposure is somewhat offset. 
C)  If two inflow currencies are negatively correlated transaction exposure is somewhat offset. 
D)  If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset. 
A)  Two highly positively correlated currencies act almost as if they are the same currency. 
B)  If two inflow currencies are highly positively correlated transaction exposure is somewhat offset. 
C)  If two inflow currencies are negatively correlated transaction exposure is somewhat offset. 
D)  If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated, transaction exposure is somewhat offset.

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.

Accepted Answer

A)  Transaction 
B)  Economic 
C)  Translation 
D)  None of the above 
A)  Transaction 
B)  Economic 
C)  Translation 
D)  None of the above

Question 5

The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD): PCFt = a0 + a1et + $\mu$t
Where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results:
  Based on these results, which of the following statements is probably not true?

Accepted Answer

A)  The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod. 
B)  The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod. 
C)  The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod. 
D)  The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod. 
E)  All of the above are true. 
A)  The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod. 
B)  The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod. 
C)  The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod. 
D)  The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod. 
E)  All of the above are true.

Question 6

Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen's depreciation.

Accepted Answer

A)  decrease 
B)  increase 
C)  remain unchanged 
D)  A and C are possible 
A)  decrease 
B)  increase 
C)  remain unchanged 
D)  A and C are possible

Question 7

Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher exposure to exchange rate risk?

Accepted Answer

A)  Diz Co. 
B)  Yanta Co. 
C)  the firms have about the same level of exposure. 
D)  neither firm has any exposure. 
A)  Diz Co. 
B)  Yanta Co. 
C)  the firms have about the same level of exposure. 
D)  neither firm has any exposure.

Question 8

One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually.

Accepted Answer

A) True 
 B)False

Question 9

Translation exposure reflects:

Accepted Answer

A)  the exposure of a firm's international contractual transactions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C)  the exposure of a firm's financial statements to exchange rate fluctuations. 
D)  the exposure of a firm's cash flows to exchange rate fluctuations. 
A)  the exposure of a firm's international contractual transactions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C)  the exposure of a firm's financial statements to exchange rate fluctuations. 
D)  the exposure of a firm's cash flows to exchange rate fluctuations.

Question 10

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.

Accepted Answer

A)  negative; positive 
B)  positive; positive 
C)  positive; negative 
D)  negative; negative 
A)  negative; positive 
B)  positive; positive 
C)  positive; negative 
D)  negative; negative

Question 11

Exhibit 10-2
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.
-Refer to Exhibit 10-2. 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.

Accepted Answer

A) -9.00%. 
B)  -30.00%. 
C)  -5.00%. 
D)  none of the above 
A) -9.00%. 
B)  -30.00%. 
C)  -5.00%. 
D)  none of the above

Question 12

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.

Accepted Answer

A)  weak; somewhat stable 
B)  weak; favorably affected 
C)  weak; adversely affected 
D)  none of the above 
A)  weak; somewhat stable 
B)  weak; favorably affected 
C)  weak; adversely affected 
D)  none of the above

Question 13

Economic exposure can affect:

Accepted Answer

A)  MNCs only. 
B)  purely domestic firms only. 
C)  A and B 
D)  none of the above 
A)  MNCs only. 
B)  purely domestic firms only. 
C)  A and B 
D)  none of the above

Question 14

If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ____ impact on the firm's ____.

Accepted Answer

A)  positive; interest expenses 
B)  positive; gross profit 
C)  negative; interest expenses 
D)  negative; gross profit 
A)  positive; interest expenses 
B)  positive; gross profit 
C)  negative; interest expenses 
D)  negative; gross profit

Question 15

Some MNCs are subject to economic exposure without being subject to transaction exposure.

Accepted Answer

A) True 
 B)False

Question 16

Exhibit 10-1
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. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s).
-Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?

Accepted Answer

A)  -0.5% 
B)  -2.2% 
C)  -1.5% 
D)  -1.2% 
A)  -0.5% 
B)  -2.2% 
C)  -1.5% 
D)  -1.2%

Question 17

Economic exposure refers to:

Accepted Answer

A)  the exposure of a firm's international contractual transactions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C)  the exposure of a firm's financial statements to exchange rate fluctuations. 
D)  the exposure of a firm's cash flows to exchange rate fluctuations. 
E)  the exposure of a country's economy (specifically GNP) to exchange rate fluctuations. 
A)  the exposure of a firm's international contractual transactions to exchange rate fluctuations. 
B)  the exposure of a firm's local currency value to transactions between foreign exchange traders. 
C)  the exposure of a firm's financial statements to exchange rate fluctuations. 
D)  the exposure of a firm's cash flows to exchange rate fluctuations. 
E)  the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.

Question 18

Which of the following is not true regarding economic exposure?

Accepted Answer

A)  Even purely domestic firms can be affected by economic exposure. 
B)  In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. 
C)  The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm. 
D)  The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected. 
E)  All of the above are true. 
A)  Even purely domestic firms can be affected by economic exposure. 
B)  In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows. 
C)  The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm. 
D)  The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected. 
E)  All of the above are true.

Question 19

Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong Kong subsidiary's revenue will ____, and its expenses will ____.

Accepted Answer

A)  increase; decrease 
B)  decrease; remain unchanged 
C)  decrease; increase 
D)  increase; remain unchanged 
A)  increase; decrease 
B)  decrease; remain unchanged 
C)  decrease; increase 
D)  increase; remain unchanged

Question 20

Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.

Accepted Answer

A) True 
 B)False

According to the text, currency variability levels perfectly stable over time, and currency correlations perfectly stable over time.

Which of the following is not true regarding currency correlations?

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.

____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.

Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen's depreciation.

One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually.

Translation exposure reflects:

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During dollar cycles, cash outflows are .

Economic exposure can affect:

If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a impact on the firm's .

Some MNCs are subject to economic exposure without being subject to transaction exposure.

Economic exposure refers to:

Which of the following is not true regarding economic exposure?

Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 10: Measuring Exposure to Exchange Rate Fluctuations

According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time.

Which of the following is not true regarding currency correlations?

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.

____ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.

Assume that the Japanese yen is expected to depreciate substantially over the next year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues. The overall value of MNC will ____ because of the yen's depreciation.

One argument why exchange rate risk is irrelevant to corporations is that shareholders can deal with this risk individually.

Translation exposure reflects:

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During ____ dollar cycles, cash outflows are ____.

Economic exposure can affect:

If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ____ impact on the firm's ____.

Some MNCs are subject to economic exposure without being subject to transaction exposure.

Economic exposure refers to:

Which of the following is not true regarding economic exposure?

Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

According to the text, currency variability levels perfectly stable over time, and currency correlations perfectly stable over time.

A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. During dollar cycles, cash outflows are .

If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a impact on the firm's .