Question 1

The ability to take advantage of the portfolio effect through exposure netting to manage foreign risk assumes the firm will use

Accepted Answer

A) centralization of its hedging activities 
B) segmentation of its hedging activities to the firm's foreign subsidiaries 
C) decentralization of its hedging activities 
D) foreign banks and the purchase of forward contracts. 
A) centralization of its hedging activities 
B) segmentation of its hedging activities to the firm's foreign subsidiaries 
C) decentralization of its hedging activities 
D) foreign banks and the purchase of forward contracts. A

Question 2

A ________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency's value of a future foreign currency cash flow.

Accepted Answer

A) forward contract 
B) currency collar 
C) money-market hedge 
D) currency option 
A) forward contract 
B) currency collar 
C) money-market hedge 
D) currency option C

Question 3

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/$1.If the spot rate in 90 days is ¥154/$,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 D

Question 4

Suppose markets are efficient,there are no taxes,and relative prices remain constant.In such a world,

Accepted Answer

A) hedging can not still be of value 
B) exchange risk management remains of vital concern 
C) markets are always free of inflation 
D) exchange risk is nonexistent 
A) hedging can not still be of value 
B) exchange risk management remains of vital concern 
C) markets are always free of inflation 
D) exchange risk is nonexistent

Question 5

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
   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 6

Suppose it is 1987 and General Motors uses a money market hedge to protect an Lit 200 million payable due in one year.The U.S.interest rate at the time of the hedge was 9% and the lira interest rate was 14%.If the spot rate moved from Lit 1293 at the start of the year to Lit 1349 at the end of the year,what was GM's cost of the money market hedge?

Accepted Answer

A) $3,647 
B) $414 
C) GM gained $1,069 
D) GM gained $5,631 
A) $3,647 
B) $414 
C) GM gained $1,069 
D) GM gained $5,631

Question 7

In a forward market hedge,a company that is long a foreign currency will ____ the foreign currency forward.

Accepted Answer

A) buy 
B) sell 
C) borrow 
D) lend 
A) buy 
B) sell 
C) borrow 
D) lend

Question 8

In 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 $0.095.If the spot rate is Ptas.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 9

If you fear the dollar will rise against the Spanish peseta,with a resulting adverse change in the dollar value of the equity of your Spanish subsidiary,you can hedge by

Accepted Answer

A) selling pesetas forward in the amount of net assets 
B) buying pesetas forward in the amount of net assets 
C) reducing the liabilities of the subsidiary 
D) selling pesetas forward in the amount of total assets 
A) selling pesetas forward in the amount of net assets 
B) buying pesetas forward in the amount of net assets 
C) reducing the liabilities of the subsidiary 
D) selling pesetas forward in the amount of total assets

Question 10

On 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

Question 11

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
-What value can Alcoa lock in for its FF 3 million receivable if it executes a forward contract today?

Accepted Answer

A) $518,700 
B) $524,100 
C) $528,900 
D) $532,410 
A) $518,700 
B) $524,100 
C) $528,900 
D) $532,410

Question 12

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
   Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the current/noncurrent 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 13

Suppose that the spot rate and the 90-day forward rate on the pound sterling are $1.35 and $1.30,respectively.Your company,wishing to avoid foreign exchange risk,sells £500,000 forward 90 days.Assuming that the spot rate remains the same 90 days hence,your company would

Accepted Answer

A) receive £500,000 90 days hence 
B) receive more than £500,000 in 90 days 
C) have been better off not to have sold pounds forward 
D) receive nothing 
A) receive £500,000 90 days hence 
B) receive more than £500,000 in 90 days 
C) have been better off not to have sold pounds forward 
D) receive nothing

Question 14

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
   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 15

Suppose the English subsidiary of a U.S.firm had current assets of £1 million,fixed assets of £2 million and current liabilities of 1 million pounds both at the start and at the end of the year.There are no long-term liabilities.If the pound depreciated during that year from $1.50 to $1.30,the translation gain loss to be included in the parent company's equity account according to FASB #52 is

Accepted Answer

A) 0 since the current assets and current liabilities cancel 
B) +$200,000 
C) -$250,000 
D) -$400,000 
A) 0 since the current assets and current liabilities cancel 
B) +$200,000 
C) -$250,000 
D) -$400,000

Question 16

American Airlines hedges a £2.5 million receivable by selling pounds forward.If the spot rate is £1 = $1.73 and the 90-day forward rate is $1.7158,what is American's cost of hedging?

Accepted Answer

A) $142,000 
B) $35,500 
C) $8,875 
D) it is unknown at the time American enters into its hedge 
A) $142,000 
B) $35,500 
C) $8,875 
D) it is unknown at the time American enters into its hedge

Question 17

The 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 18

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 19

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 20

Dell 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

The ability to take advantage of the portfolio effect through exposure netting to manage foreign risk assumes the firm will use

A ________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency's value of a future foreign currency cash flow.

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/$1.If the spot rate in 90 days is ¥154/$,how much has this forward market hedge cost PepsiCo?

Suppose markets are efficient,there are no taxes,and relative prices remain constant.In such a world,

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: Suppose the DM appreciates from $0.70 to $0.76 during the period. -Under the temporal method,what is Ajax's translation gain loss.?

In a forward market hedge,a company that is long a foreign currency will ____ the foreign currency forward.

In 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 $0.095.If the spot rate is Ptas.1 = $0.087 in one year,what is the cost to Ford of this money market hedge?

If you fear the dollar will rise against the Spanish peseta,with a resulting adverse change in the dollar value of the equity of your Spanish subsidiary,you can hedge by

On 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?

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: Suppose the DM appreciates from $0.70 to $0.76 during the period. -Under the current/noncurrent method,what is Ajax's translation gain loss.?

Suppose that the spot rate and the 90-day forward rate on the pound sterling are $1.35 and $1.30,respectively.Your company,wishing to avoid foreign exchange risk,sells £500,000 forward 90 days.Assuming that the spot rate remains the same 90 days hence,your company would

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: 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?

American Airlines hedges a £2.5 million receivable by selling pounds forward.If the spot rate is £1 = $1.73 and the 90-day forward rate is $1.7158,what is American's cost of hedging?

The basic hedging strategy involves

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

Translation exposure reflects the exposure of a company's

Dell 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?

Introduction

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 Analysis

The Foreign Exchange Market

Currency Futures and Options Markets

Swaps and Interest Rate Derivatives

Measuring and Managing Economic Exposure

International Financing and National Capital Markets

Functions of Euromarkets

The Cost of Capital for Foreign Investments

Examining International Portfolio Investing

Corporate Strategy and Foreign Direct Investment

Capital Budgeting for the Multinational Corporation

Financing Foreign Trade

Current Asset Management and Short-Term Financing

Managing the Multinational Financial System

Filters

Exam 10: Measuring and Managing Translation and Transaction Exposure

The ability to take advantage of the portfolio effect through exposure netting to manage foreign risk assumes the firm will use

A ________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency's value of a future foreign currency cash flow.

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/$1.If the spot rate in 90 days is ¥154/$,how much has this forward market hedge cost PepsiCo?

Suppose markets are efficient,there are no taxes,and relative prices remain constant.In such a world,

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: Suppose the DM appreciates from $0.70 to $0.76 during the period. -Under the temporal method,what is Ajax's translation gain loss.?

In a forward market hedge,a company that is long a foreign currency will ____ the foreign currency forward.

In 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 $0.095.If the spot rate is Ptas.1 = $0.087 in one year,what is the cost to Ford of this money market hedge?

If you fear the dollar will rise against the Spanish peseta,with a resulting adverse change in the dollar value of the equity of your Spanish subsidiary,you can hedge by

On 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?

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: Suppose the DM appreciates from $0.70 to $0.76 during the period. -Under the current/noncurrent method,what is Ajax's translation gain loss.?

Suppose that the spot rate and the 90-day forward rate on the pound sterling are $1.35 and $1.30,respectively.Your company,wishing to avoid foreign exchange risk,sells £500,000 forward 90 days.Assuming that the spot rate remains the same 90 days hence,your company would

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: 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?

American Airlines hedges a £2.5 million receivable by selling pounds forward.If the spot rate is £1 = $1.73 and the 90-day forward rate is $1.7158,what is American's cost of hedging?

The basic hedging strategy involves

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

Translation exposure reflects the exposure of a company's

Dell 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?

Introduction

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 Analysis

The Foreign Exchange Market

Currency Futures and Options Markets

Swaps and Interest Rate Derivatives

Measuring and Managing Economic Exposure

International Financing and National Capital Markets

Functions of Euromarkets

The Cost of Capital for Foreign Investments

Examining International Portfolio Investing

Corporate Strategy and Foreign Direct Investment

Capital Budgeting for the Multinational Corporation

Financing Foreign Trade

Current Asset Management and Short-Term Financing

Managing the Multinational Financial System

Filters