Deck 10: Measuring and Managing Economic Exposure

Question 1

With respect to production management of exchange risk, ________ and plant location are the principal variables that companies may change to manage the risk.

A) product innovation
B) product retirement
C) market selection
D) product sourcing

Answer 1

A

Question 2

One way an MNC may improve productivity in the face of exchange rate volatility is by revising ________.

A) product offerings
B) the input mix
C) shifting production among plants
D) changing the promotional strategy

Answer 2

A

Question 3

During periods of exchange rate volatility, firms dealing in _______ products face more exchange rate risk that the firms selling _________ products.
A) differentiated, undifferentiated
A) low demand, high demand

A) low supply, high supply
C) undifferentiated, differentiated

Answer 3

C

Question 4

The greatest boost to a firm's competitiveness comes from compressing the time it takes to bring new and improved products to market also known as _________.

A) product innovation
B) product cycle
C) input mix
D) market segmentation

Question 5

_______ exposure arises because currency fluctuations can alter a company's future revenues and expenses.

A) Transaction
B) Operating
C) Political
D) Translation

Question 6

The appropriate response for a U.S. exporter to appreciation of the dollar would be to

A) raise the foreign currency price if the dollar appreciation was expected to be temporary and the cost of regaining market share was minimal
B) move some production offshore if the appreciation were expected to persist for an extended period
C) keep the foreign currency price constant if demand is quite elastic
D) all of the above

Question 7

All of the following are appropriate responses for a U.S. exporter to an appreciation of the dollar EXCEPT

A) raise the foreign currency price if the dollar appreciation was expected to be temporary and the cost of regaining market share was minimal
B) move some production offshore if the appreciation were expected to persist for an extended period
C) keep the foreign currency price constant if demand is highly elastic
D) keep the local currency price constant if demand is highly elastic

Question 8

A company producing an undifferentiated product and competing with internationally diversified competitors will face a relatively ___ price elasticity of demand for its products and possess a relatively ___ degree of pricing flexibility.

A) high, low
B) low, low
C) low, high
D) high, high

Question 9

A company producing an undifferentiated product and competing with internationally diversified competitors will face a relatively __ price elasticity of demand for its products and possess a relatively ___ degree of pricing flexibility.

A) high, low
B) low, low
C) low, high
D) high, high

Question 10

In the face of exchange rate volatility, developing a pricing strategy must address two key issues:

A) market selection and segmentation
B) market share and selection
C) market share and profit margin
D) market share and segmentation

Question 11

The _______ the price elasticity of demand, the _____ the incentive to hold down price and thereby expand sales.

A) lower, greater
B) lower, lower
C) greater, lower
D) greater, greater

Question 12

With respect to home currency (HC) appreciation, the key issue for a domestic firm is its degree of ____.

A) market share
B) product differentiation
C) marketing plan
D) pricing flexibility

Question 13

Economic exposure is based on the extent to which the ______ of the firm will change when exchange rates change.
A) competitive advantages

A) value
B) current assets
C) long-term liabilities

Question 14

While the strategic marketing and production adjustments occur over the long run, financial management may finance the firm's operations such that shortfalls in cash flows during the adjustments are offset by a reduction in __________ expenses.

A) marketing
B) production
C) debt-servicing
D) hedging

Question 15

Which one of the following areas is NOT a way companies often respond to exchange rate risk when they alter their product strategy?

A) shifting the firm's manufacturing base to another country
B) the timing of new-product introduction
C) changing the size of its product line
D) product innovation with advanced technology

Question 16

When we examine operating exposure, the key issue for a domestic firm is its

A) prior import competition
B) pricing flexibility
C) asset valuation adjustment
D) low import content

Question 17

A weak dollar will
A) enable American importers to reduce their dollar costs

A) force American exporters to raise their foreign currency prices
C) enable American exporters to improve their profit margins
D) cost American exporters market share abroad

Question 18

During a home currency appreciation, exporters may pull out of markets that foreign competition makes ________.

A) unprofitable
B) more competitive
C) profitable
D) more liquid

Question 19

Which of the following strategies assumes that the MNC has already collected a portfolio of different facilities world wide?

A) production shifting
B) product innovation
C) product sourcing
D) raising productivity

Question 20

Volkswagen almost went bankrupt in 1973 for all of the following EXCEPT

A) it failed to offset the exchange risk associated with its cost structure and revenue structure with a suitable liability structure
B) it gambled on the value of dollars
C) it priced its cars in dollars
D) it produced in many locations globally

Question 21

Suppose Apple is selling Macintosh computers in Germany in 1990 for DM 5,500 when the exchange rate was DM 1 = $0.68. If the DM rises to $0.71, what price must Apple charge to maintain its dollar unit revenue?

A) DM 5,147
B) DM 6,361
C) DM 5,743
D) DM 5,268

Question 22

Nissan, the Japanese car manufacturer, exports a substantial fraction of its output to the United States. What financial measures would be suitable for Nissan to take to reduce its currency risk?

A) borrow only yen to finance its operations
B) borrow dollars to finance part of its operations
C) sell yen forward in the amount of its annual shipments to the U.S.
D) buy yen forward in the amount of its annual shipments to the U.S.

Question 23

Which of the following products is most likely to benefit from depreciation of the dollar?

A) high?end signal processor from Hewlett?Packard that faces minimal competition
B) Chevrolet automobile with a highly price elastic demand
C) Mercedes?Benz auto facing price inelastic demand
D) low?end Japanese machine tool

Question 24

Shorter product cycles can improve currency risk management by allowing the firm to

A) incorporate more up?to?date technology in its products
B) respond more quickly to changing market conditions
C) reduce the average price elasticity of demand
D) maintain its current line of products

Question 25

Jet engine manufacturing entails enormous economies of scale. Pratt & Whitney, a large U.S. jet engine producer, faces substantial competition from Rolls?Royce, the British engine manufacturer. What would be the best way for P & W to cope with a dollar that has recently appreciated by 50%?

A) accelerate R&D spending and cost?cutting efforts
B) shift some of its production abroad
C) raise the foreign currency prices of its engines sold abroad
D) buy dollars forward

Question 26

Following a devaluation of the Greek drachma, which of the following products sold in Greece is most likely to bear a drachma price increase?

A) Fiat automobile, sold to the low end of the market
B) Kentucky Fried Chicken dinner, facing competition from local fast food restaurants
C) IBM mainframe computer, whose only competition comes from other American computer companies
D) shirts from Hong Kong, facing competition from local manufacturers

Question 27

S. exporter that anticipates an appreciation of the dollar should

A) sell foreign currencies forward
B) borrow foreign currencies
C) scout out possible foreign production sites
D) consider raising dollar prices on exports

Question 28

In the face of an appreciating yen, Toyota should consider

A) investing in U.S. production facilities
B) raising its research and development investment
C) coming out with new cars targeted at the low end of the market
D) a and b only

Question 29

Sumitomo Bank wants to expand its lending in the United States, but to do so it needs to raise more long?term debt capital to help finance these loans. Currently, long?term interest rates are 9.5% in the U.S. and 6.3% in Japan. What would you recommend Sumitomo do?

A) raise yen in Japan because of the lower cost of money
B) raise yen in Japan because Japanese investors are more patient than U.S. investors
C) raise dollars in the U.S. to hedge against currency risk
D) raise dollars in the U.S. to avoid depressing Tokyo stocks

Question 30

Suppose McDonald's charges Ptas. 25 for a burger in Madrid. Its costs are Ptas. 18 per burger and these costs are not expected to change with the exchange rate. If the peseta devalues from $0.107 to $0.096, what price will McDonald's have to charge for its burgers to maintain its dollar profit margin?

A) Ptas. 25.80
B) Ptas. 27.86
C) Ptas. 22.43
D) Ptas. 24