Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

A purely domestic firm is never exposed to exchange rate fluctuations.

Accepted Answer

A) True 
 B)False

Question 3

When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ____ affected.

Accepted Answer

A)  favorably; favorably affected but by a smaller degree 
B)  favorably; favorably affected by a higher degree 
C)  unfavorably; favorably affected 
D)  favorably; unfavorably affected 
A)  favorably; favorably affected but by a smaller degree 
B)  favorably; favorably affected by a higher degree 
C)  unfavorably; favorably affected 
D)  favorably; unfavorably affected

Question 4

A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should:

Accepted Answer

A)  increase local sales as it reduces foreign competition in local markets. 
B)  increase the firm's exports denominated in the local currency. 
C)  increase the returns earned on the firm's foreign bank deposits. 
D)  increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. 
E)  none of the above 
A)  increase local sales as it reduces foreign competition in local markets. 
B)  increase the firm's exports denominated in the local currency. 
C)  increase the returns earned on the firm's foreign bank deposits. 
D)  increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. 
E)  none of the above

Question 5

The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:

Accepted Answer

A)  the expected percentage change in the currency for the next day. 
B)  the standard deviation of the daily percentage changes in the currency over a previous period. 
C)  the current level of interest rates. 
D)  the confidence level used. 
A)  the expected percentage change in the currency for the next day. 
B)  the standard deviation of the daily percentage changes in the currency over a previous period. 
C)  the current level of interest rates. 
D)  the confidence level used.

Question 6

____ is (are) not a determinant of translation exposure.

Accepted Answer

A)  The MNC's degree of foreign involvement 
B)  The locations of foreign subsidiaries 
C)  The local (domestic) earnings of the MNC 
D)  The accounting methods used 
A)  The MNC's degree of foreign involvement 
B)  The locations of foreign subsidiaries 
C)  The local (domestic) earnings of the MNC 
D)  The accounting methods used

Question 7

If the U.S. dollar appreciates,

Accepted Answer

A)  an MNC's U.S. sales will probably decrease. 
B)  an MNC's exports denominated in U.S. dollars will probably increase. 
C)  an MNC's interest owed on foreign funds borrowed will probably increase. 
D)  an MNC's exports denominated in foreign currencies will probably increase. 
E)  all of the above 
A)  an MNC's U.S. sales will probably decrease. 
B)  an MNC's exports denominated in U.S. dollars will probably increase. 
C)  an MNC's interest owed on foreign funds borrowed will probably increase. 
D)  an MNC's exports denominated in foreign currencies will probably increase. 
E)  all of the above

Question 8

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. What is the portfolio standard deviation?

Accepted Answer

A)  3.00%. 
B)  5.44%. 
C)  17.98%. 
D)  none of the above 
A)  3.00%. 
B)  5.44%. 
C)  17.98%. 
D)  none of the above

Question 9

Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower.

Accepted Answer

A) True 
 B)False

Question 10

One argument for exchange rate irrelevance is that:

Accepted Answer

A)  MNCs can hedge exchange rate exposure much more effectively than individual investors. 
B)  investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates. 
C)  purchasing power parity does not hold very well. 
D)  MNCs are typically not diversified across numerous countries. 
A)  MNCs can hedge exchange rate exposure much more effectively than individual investors. 
B)  investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates. 
C)  purchasing power parity does not hold very well. 
D)  MNCs are typically not diversified across numerous countries.

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

A purely domestic firm is never exposed to exchange rate fluctuations.

When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are affected by translation exposure. When the dollar weakens, the reported consolidated earnings are affected.

A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should:

The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:

____ is (are) not a determinant of translation exposure.

If the U.S. dollar appreciates,

Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower.

One argument for exchange rate irrelevance is that:

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

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

A purely domestic firm is never exposed to exchange rate fluctuations.

When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ____ affected.

A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should:

The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:

____ is (are) not a determinant of translation exposure.

If the U.S. dollar appreciates,

Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard deviations of the individual currencies are lower.

One argument for exchange rate irrelevance is that:

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

When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are affected by translation exposure. When the dollar weakens, the reported consolidated earnings are affected.