Deck 10: Measuring Exposure to Exchange Rate Fluctuations

Question 1

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

Answer 1

C

Question 2

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

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

Answer 2

E

Question 3

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

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

Answer 3

C

Question 4

A set of currency cash inflows is more volatile if the correlations are low.

Question 5

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 _______.

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

Question 6

Economic exposure refers to:

A) the exposure of a firm's ongoing international transac tions to exchange rate fluctuations.
B) the exposure of a firm's local currency value to transac tions 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 7

Assume that the British pound and Swiss franc are highly correlated.  A U.S.firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds.  During a _______ cycle,the firm is _______ affected by its exposure.

A) strong dollar;favorably
B) weak dollar;not
C) strong dollar;not
D) weak dollar;favorably

Question 8

Jacko Co.is a U.S.based MNC with net cash inflows of Singapore dollars and net cash inflows of Sunland francs.  These two currencies are highly negatively correlated in their movements against the dollar.  Kriner Co.is a U.S.based MNC that has the same exposure as Jacko Co.in these currencies,except that its Sunland francs represent cash outflows.  Which firm has a high exposure to exchange rate risk

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

Question 9

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

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 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.

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

Question 11

If a U.S.firm's cost of goods sold exposure is much greater than its sales exposure in Switzerland,there is a _______ overall impact of the Swiss franc's depreciation against the dollar on _______.

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

Question 12

Magent Co.is a U.S.company that has exposure to the Swiss francs (SF)and Danish kroner (DK).It has net inflows of SF200 million and net outflows of DK500 million.  The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10.  Magent Co.has not hedged these positions.  The SF and DK are highly correlated in their movements against the dollar.  If the dollar weakens,then Magent Co.will:

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

Question 13

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

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

Question 14

Translation exposure reflects:

A) the exposure of a firm's ongoing international transac tions to exchange rate fluctuations.
B) the exposure of a firm's local currency value to transac tions 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 15

Under FASB 52:

A) translation gains and losses are included in the reported net income.
B) translation gains and losses are included in stock holder's equity.
C) A and B
D) none of the above

Question 16

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

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 17

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

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

Question 18

Transaction exposure reflects:

A) the exposure of a firm's ongoing international transac tions to exchange rate fluctuations.
B) the exposure of a firm's local currency value to transac tions 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 19

Generally,MNCs with less foreign costs than foreign revenue will be _______ affected by a _______ foreign currency.

A) favorably;stronger
B) not;stronger
C) favorably;weaker
D) not;weaker
E) B and D

Question 20

Economic exposure can affect:

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

Question 21

Appreciation in a firm's local currency causes a(n)__________ in cash inflows and a(n)_________ in cash outflows.

A) reduction;reduction
B) increase;increase
C) increase;reduction
D) reduction;increase

Question 22

The __________ the percentage of an MNC's business conducted by its foreign subsidiaries,the _________ the percentage of a given financial statement item that is susceptible to translation exposure.

A) greater;smaller
B) smaller;greater
C) greater;greater
D) none of the above

Question 23

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

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 24

Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000,while Subsidiary B has net outflows in Australian dollars of A$1,500,000.The expected exchange rate of the Australian dollar is $.55.What is the net inflow or outflow as measured in U.S.dollars

A) $500,000 outflow.
B) $500,000 inflow.
C) $275,000 inflow.
D) $275,000 outflow.

Question 25

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

Question 26

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

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 27

Assume that Mill Corporation,a U.S.-based MNC,has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements:

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 is the percentage change in the exchange rate of the currency over period t.The regression model estimates a coefficient of
of 2.This indicates that:

A) if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%.
B) if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%.
C) if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%.
D) if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%.
E) none of the above

Question 28

If an MNC expects cash inflows of equal amounts in two currencies,and the two currencies are ___________ correlated,the MNC's transaction exposure is relatively ___________.

A) negatively;high
B) negatively;low
C) positively;low
D) none of the above

Question 29

___________ exposure is the degree to which the value of future cash transactions can be affected by exchange rate fluctuations.

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

Question 30

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.Using the value-at-risk (VAR)method based on a 95% confidence level,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.

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

Question 31

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.What is the portfolio standard deviation

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

Question 32

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.

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

Question 33

If the U.S.dollar appreciates:

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 34

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.Using the value-at-risk (VAR)method based on a 95% confidence level,what is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%

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

Question 35

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.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.

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

Question 36

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.

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

Question 37

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):

Based on these results,which of the following statements is probably not 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 38

One argument for exchange rate irrelevance is that:

A) MNCs can hedge exchange rate exposure much more effectively than individual investors.
B) diversified stakeholders will not be affected by exchange rate movements because of offsetting effects.
C) purchasing power parity does not hold very well.
D) MNCs are typically not diversified across numerous countries.

Question 39

If an MNC has a net inflow in one currency and a net outflow of about the same amount in another currency,then the MNCs' transaction exposure is _______ is the two currencies are ________ correlated.

A) high;positively
B) low;negatively
C) high;negatively
D) none of the above

Question 40

Which of the following is not a form of exposure to exchange rate fluctuations

A) transaction exposure.
B) credit exposure.
C) economic exposure.
D) translation exposure.

Question 41

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

Question 42

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

Question 43

U.S.exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margin.

Question 44

A reduction in hedging will probably reduce transaction exposure.

Question 45

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

Question 46

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

Question 47

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:

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

Question 48

Consider an MNC that is exposed to the Bulgarian lev (BGL)and the Romanian leu (ROL).30% of the MNC's funds are lev and 70% are leu.The standard deviation of exchange movements is 10% for lev and 15% for leu.The correlation coefficient between movements in the value of the lev and the leu is.85.Based on this information,the standard deviation of this two-currency portfolio is approximately:

A) 17.28%.
B) 13.15%.
C) 14.50%.
D) 12.04%.

Question 49

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.

Question 50

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

Question 51

In general,translation exposure is more closely monitored when the foreign earnings of the subsidiaries are more likely to be remitted to the parent.

Question 52

Assume a regression is run of the firm's stock price percentage change on the percentage change in the foreign currency.The coefficient is negative.This implies that the company's stock price increases if the foreign currency appreciates.

Question 53

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

Question 54

A company may become more exposed or sensitive to an individual currency's movements over time for several reasons,including a reduction in hedging,a greater involvement in the foreign country,or an increased use of the foreign currency.

Question 55

Two highly negatively correlated currencies act almost as if they are the same currency.

Question 56

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

Question 57

A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.

Question 58

Translation exposure is less of a concern when earnings are not remitted by the subsidiary to the parent.

Question 59

A firm's transaction exposure in any foreign currency is based solely on the size of its open position in that currency.