Deck 10: Managing Operating Exposure to Currency Risk

Question 1

If purchasing power parity does not hold, then markets are at least partially segmented.

Answer 1

True

Question 2

Segmented markets are markets that discriminate on the basis of race, creed, or color.

Answer 2

False

Question 3

Change in financial accounting statements arising from unexpected changes in currency values is called ______ to currency risk.

A) economic exposure
B) operating exposure
C) transaction exposure
D) translation exposure
E) None of the above

Answer 3

translation exposure

Question 4

In an integrated financial market, purchasing power parity holds so that equivalent assets trade for the same price regardless of where they are traded.

Question 5

Real asset hedges of operating exposure to currency risk are less difficult to construct than financial market hedges.

Question 6

Operating hedges are zero-NPV transactions.

Question 7

Operating exposure is defined as change in the firm's operations in response to currency risk.

Question 8

A real appreciation of the domestic currency helps importers and hurts exporters.

Question 9

Economic exposure to currency risk is defined as change in the value of future cash flows due to unexpected changes in currency values.

Question 10

Change in the value of noncontractual cash flows due to unexpected changes in currency values is called ______ to currency risk.

A) economic exposure
B) operating exposure
C) transaction exposure
D) translation exposure
E) None of the above

Question 11

Operating exposure to currency risk is easy to hedge with currency forwards.

Question 12

Regressions based on historical relationships can be unsatisfactory indicators of expected future exposure to currency risk.

Question 13

Economic exposure is far more important than translation exposure to the value of the multinational corporation.

Question 14

The classic exporter manufactures goods in the local economy and sells the output in competitive global markets.

Question 15

Net monetary assets is another term for shareholders' equity.

Question 16

MNCs can be exposed to more than one foreign currency.

Question 17

Change in the value of contractual cash flows due to unexpected changes in currency values is called ______ to currency risk.

A) economic exposure
B) operating exposure
C) transaction exposure
D) translation exposure
E) None of the above

Question 18

The classic importer buys goods in segmented foreign markets and sells them in local markets.

Question 19

Translation exposure is defined as change in the value of contractual cash flows due to unexpected changes in currency values.

Question 20

Change in the value of future cash flows due to unexpected changes in exchange rates is called _______ to currency risk.

A) economic exposure
B) operating exposure
C) transaction exposure
D) translation exposure
E) None of the above

Question 21

The _______ is positively exposed to the real value of the domestic currency.

A) classic exporter
B) classic importer
C) typical domestic firm
D) globally competitive firm
E) None of the above

Question 22

Operating cash flows that are exposed to currency risk are affected primarily by ______.

A) changes in domestic inflation
B) changes in foreign inflation
C) changes in nominal exchange rates
D) changes in real exchange rates
E) None of the above

Question 23

The _______ is negatively exposed to the real value of the domestic currency.

A) classic exporter
B) classic importer
C) typical domestic firm
D) globally competitive firm
E) None of the above

Question 24

Exposure to currency risk is measured as the percentage change in ______.

A) currency values given a percentage change in exchange rates
B) exchange rates given a percentage change in currency values
C) exchange rates given a percentage change in value
D) value given a percentage change in exchange rates
E) None of the above

Question 25

Exposure to currency risk ______.

A) can be thought of as a regression coefficient
B) cannot be measured by conventional methods
C) is equal to the price elasticity of demand
D) is equal to the variability of currency values
E) is equal for all companies

Question 26

Price elasticity of demand is defined as minus the percentage change in ______.

A) interest rates for a given change in money supply
B) money supply for a given change in interest rates
C) price for a given percentage change in quantity demanded
D) quantity demanded for a given percentage change in price
E) None of the above

Question 27

An importer's financial market hedging alternatives include each of a) through d) EXCEPT

A) Buy the foreign currency with long-dated forward contracts.
B) Invest in long-dated foreign bonds.
C) Use currency swaps to acquire financial assets in the foreign currency.
D) Use a rolling hedge to repeatedly sell the foreign currency.
E) None of the above

Question 28

The classic _______ is relatively insensitive to currency fluctuations.

A) domestic firms
B) exporters
C) importers
D) multinational corporations
E) Each of the above is sensitive to changes in foreign exchange rates

Question 29

The classic exporter has ______.

A) both revenues and expenses that are determined globally
B) both revenues and expenses that are determined locally
C) revenues that are determined locally and expenses that are determined globally
D) revenues that are determined globally and expenses that are determined locally
E) None of the above

Question 30

Operating exposure to currency risk is most effectively managed by ______.

A) hedging with currency forwards or futures
B) hedging with currency options
C) hedging with real assets
D) hedging with virtual assets
E) None of the above

Question 31

Monetary cash flows that are exposed to currency risk are affected primarily by ______.

A) changes in domestic unemployment
B) changes in foreign unemployment
C) changes in nominal exchange rates
D) changes in real exchange rates
E) None of the above

Question 32

The classic importer has ______.

A) both revenues and expenses that are determined globally
B) both revenues and expenses that are determined locally
C) revenues that are determined locally and expenses that are determined globally
D) revenues that are determined globally and expenses that are determined locally
E) None of the above

Question 33

Shareholders' exposure to currency risk is equal to ______.

A) assets less liabilities
B) credits less debits
C) net monetary assets plus real assets
D) the sum of transaction exposure and operating exposure
E) None of the above

Question 34

The globally competitive multinational corporation typically has ______.

A) both revenues and expenses that are determined globally
B) both revenues and expenses that are determined locally
C) revenues that are determined locally and expenses that are determined globally
D) revenues that are determined globally and expenses that are determined locally
E) None of the above

Question 35

The domestic currency value of a monetary cash flow denominated in a foreign currency changes _______ with a change in the value of the foreign currency.

A) disproportionately
B) the currency of denomination
C) not at all
D) one for one
E) None of the above

Question 36

An exporter's financial market hedging alternatives include each of a) through c) EXCEPT

A) Buy the foreign currency with long-dated forward contracts.
B) Use currency swaps to acquire financial liabilities in the foreign currency.
C) Use a rolling hedge to repeatedly sell the foreign currency.
D) More than one of the above
E) None of the above

Question 37

Managers should assess the performance of financial market hedges of operating exposures by ______.

A) assessing the interaction of operating performance with exchange rate changes
B) varying pro forma operating performance within reasonable limits
C) varying the exchange rate and assessing the resulting competitive position of the firm
D) More than one of the above
E) None of the above

Question 38

When goods markets are segmented from other markets, goods prices are determined ______.

A) in foreign markets
B) in the global market
C) in the local market
D) All of the above
E) None of the above

Question 39

The domestic currency value of an expected future operating cash flow denominated in a foreign currency changes _______ with a change in the value of the foreign currency.

A) disproportionately
B) the currency of denomination
C) not at all
D) one for one
E) None of the above

Question 40

A disadvantage of real asset hedges is that ______.

A) bid-ask spreads can be large
B) daily marking to market can cause cash flow mismatches
C) option premiums can be large
D) they are unlikely to be zero-NPV transactions
E) they come in only a limited number of currencies and maturities

Question 41

The main advantage of a financial market hedge of operating exposure to currency risk is that ______.

A) financial market hedges can completely cancel operating exposures to currency risk
B) it is relatively easy to assess the effectiveness of a financial market hedge of operating exposure
C) the costs of buying or selling financial instruments are low compared to the costs of investing or disinvesting in real assets
D) the uncertain cash flows of operating exposures to currency risk are exactly offset by the uncertain outcomes of a financial market hedge
E) None of the above

Question 42

Operational hedges can create value by ______.

A) reducing agency costs.
B) reducing expected taxes
C) reducing costs of financial distress
D) More than one of the above
E) None of the above

Question 43

Multinational corporations have an advantage over domestic firms in their ______.

A) market selection and promotion strategies
B) plant location decisions
C) product sourcing decisions
D) More than one of the above
E) None of the above

Question 44

A Dutch exporter has dollar revenues and euro expenses. The company's competitors are U.S. firms that have revenues and expenses denominated in dollars. Sensible pricing strategies that the Dutch exporter can pursue in response to an appreciation of the dollar include which of a) through c)?

A) Maintain the current euro price for their goods, try to sell the same quantity in the U.S. market, and capture a bigger contribution margin per unit.
B) Maintain the current dollar price for their goods and try to increase profits by increasing sales volume at the current contribution margin.
C) Follow the lead of the price leader in the U.S. market.
D) More than one of the above
E) None of the above

Question 45

The percent of the variation in asset value that is explained by variation in a currency value is called the ______.

A) beta
B) price elasticity of demand
C) r-square
D) slope coefficient
E) None of the above

Question 46

Dimensions of diversification that can reduce variability in the multinational corporation's operating cash flows include ____:

A) currency and geographic diversification
B) currency and product market diversification
C) geographic and product market diversification
D) currency and virtual diversification
E) None of the above