Question 1

An MNC can avoid translation exposure if its earnings are not remitted by the foreign subsidiary to the parent.

Accepted Answer

A) True 
 B)False

Question 2

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

Accepted Answer

A) True 
 B)False

Question 3

The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used.

Accepted Answer

A) True 
 B)False

Question 4

Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05.

Accepted Answer

A)  $3,675,000 outflow 
B)  $525,000 outflow 
C)  $525,000 inflow 
D)  $210,000 outflow 
A)  $3,675,000 outflow 
B)  $525,000 outflow 
C)  $525,000 inflow 
D)  $210,000 outflow

Question 5

Under FASB 52, consolidated earnings are sensitive to the functional currency's weighted average exchange rate.

Accepted Answer

A) True 
 B)False

Question 6

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

Accepted Answer

A) True 
 B)False

Question 7

The Canadian dollar consistently appears to move almost independently of other currencies. That is it exhibits low correlations with the other currencies.

Accepted Answer

A) True 
 B)False

Question 8

Currency correlations are generally negative.

Accepted Answer

A) True 
 B)False

Question 9

Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC's funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:

Accepted Answer

A)  5.13%. 
B)  2.63%. 
C)  4.33%. 
D)  5.55%. 
A)  5.13%. 
B)  2.63%. 
C)  4.33%. 
D)  5.55%.

Question 10

A reduction in hedging will probably reduce transaction exposure.

Accepted Answer

A) True 
 B)False

Question 11

Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is $.012 while the present exchange rate of the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will:

Accepted Answer

A)  benefit, because the dollar value of its pound position exceeds the dollar value of its yen position. 
B)  benefit, because the dollar value of its yen position exceeds the dollar value of its pound position. 
C)  be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position. 
D)  be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position. 
A)  benefit, because the dollar value of its pound position exceeds the dollar value of its yen position. 
B)  benefit, because the dollar value of its yen position exceeds the dollar value of its pound position. 
C)  be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position. 
D)  be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.

Question 12

Translation exposure affects an MNC's cash flows.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following operations benefits from appreciation of the firm's local currency?

Accepted Answer

A)  borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation. 
B)  receiving earnings dividends from foreign subsidiaries. 
C)  purchasing supplies locally rather than overseas. 
D)  exporting to foreign countries. 
A)  borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation. 
B)  receiving earnings dividends from foreign subsidiaries. 
C)  purchasing supplies locally rather than overseas. 
D)  exporting to foreign countries.

Question 14

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following operations benefit(s) from depreciation of the firm's local currency?

Accepted Answer

A)  borrowing in a foreign country and converting the funds to the local currency prior to the depreciation. 
B)  purchasing foreign supplies. 
C)  investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency. 
D)  A and B 
A)  borrowing in a foreign country and converting the funds to the local currency prior to the depreciation. 
B)  purchasing foreign supplies. 
C)  investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency. 
D)  A and B

Question 16

If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.

Accepted Answer

A) True 
 B)False

Question 17

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

Accepted Answer

A) True 
 B)False

Question 18

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.

Accepted Answer

A) True 
 B)False

Question 19

In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local currency.

Accepted Answer

A)  be hurt by; appreciated 
B)  benefit from; depreciated 
C)  be hurt by; depreciated 
D)  none of the above 
A)  be hurt by; appreciated 
B)  benefit from; depreciated 
C)  be hurt by; depreciated 
D)  none of the above

Question 20

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 in dollars if the expected percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro (before considering the maximum one-day loss) is $1.01.

Accepted Answer

A)  -$75,750. 
B)  -$60,600. 
C) -$111,100. 
D) -$25,250. 
A)  -$75,750. 
B)  -$60,600. 
C) -$111,100. 
D) -$25,250.

An MNC can avoid translation exposure if its earnings are not remitted by the foreign subsidiary to the parent.

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used.

Under FASB 52, consolidated earnings are sensitive to the functional currency's weighted average exchange rate.

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

The Canadian dollar consistently appears to move almost independently of other currencies. That is it exhibits low correlations with the other currencies.

Currency correlations are generally negative.

A reduction in hedging will probably reduce transaction exposure.

Translation exposure affects an MNC's cash flows.

Which of the following operations benefits from appreciation of the firm's local currency?

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

Which of the following operations benefit(s) from depreciation of the firm's local currency?

If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.

In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely a(n) local 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

An MNC can avoid translation exposure if its earnings are not remitted by the foreign subsidiary to the parent.

If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if these two currencies are negatively correlated because the transaction exposure is offset.

The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used.

Under FASB 52, consolidated earnings are sensitive to the functional currency's weighted average exchange rate.

The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction exposure.

The Canadian dollar consistently appears to move almost independently of other currencies. That is it exhibits low correlations with the other currencies.

Currency correlations are generally negative.

A reduction in hedging will probably reduce transaction exposure.

Translation exposure affects an MNC's cash flows.

Which of the following operations benefits from appreciation of the firm's local currency?

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

Which of the following operations benefit(s) from depreciation of the firm's local currency?

If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.

The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.

Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions because economic conditions are unpredictable.

In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local 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

In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely a(n) local currency.