Deck 9: Managing Transaction Exposure to Currency Risk

Question 1

Geographically diversified operations provide a natural hedge of transaction exposure to currency risk because ______.

A) operating costs in one country are unlikely to be related to costs in another country
B) it is easy to replace sales in one country with sales from another country
C) when one currency is depreciating, another currency must be appreciating
D) Two of the above
E) None of the above

Answer 1

when one currency is depreciating, another currency must be appreciating

Question 2

The multinational corporation's economic exposure to currency risk is made up of transaction exposure and operating exposure.

Answer 2

True

Question 3

Internal methods of reducing the MNC's transaction exposure to currency risk include each of a) through c) EXCEPT

A) multinational netting
B) leading and lagging of intracompany transactions
C) hedging in the currency forward markets
D) Each of the above is a way to reduce transaction exposure internally
E) None of the above are a way of reducing transaction exposure internally

Answer 3

hedging in the currency forward markets

Question 4

An option premium is paid by the buyer to the seller at the time the option is purchased.

Question 5

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

Question 6

Currency options are the most popular currency hedge.

Question 7

The preferred way to hedge transaction exposure to currency risk is ______. *

A) by offsetting exposures within the firm
B) through forward currency contracts
C) through futures contracts
D) through swap contracts
E) None of the above-exposures should be left unhedged

Question 8

A currency call option gives the buyer the right to buy an underlying currency at an exchange rate and on an expiration date that is determined by the option contract.

Question 9

A benefit of leading and lagging is that it does not distort the returns earned by the various affiliates.

Question 10

Market prices allow the treasury to ______.

A) avoid transactions costs on internal hedges
B) benchmark the costs of internal hedges
C) use transfer prices to minimize the MNC's tax liability
D) More than one of the above
E) None of the above

Question 11

Transaction exposure to currency risk is defined as change in financial accounting statements arising from unexpected changes in currency values.

Question 12

Every corporate cash flow denominated in a foreign currency has a transaction exposure to currency risk.

Question 13

The option premium compensates the seller for the expected loss should the option be exercised by the buyer.

Question 14

Transaction exposure is defined as change in the value of monetary (contractual) cash flows due to an unexpected change in exchange rates.

Question 15

The currency risk exposure given the most attention by financial managers is ______.

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

Question 16

The seller of a currency call option has the obligation to deliver the specified currency at the exercise price.

Question 17

A currency swap is an exchange of one currency for another in the spot market.

Question 18

To avoid influencing divisional hedging decisions, the corporate treasury should charge operating divisions the same price for a currency hedge (such as a forward contract) regardless of when the hedge is executed.

Question 19

Currency futures are like currency forwards except that they are marked-to-market daily.

Question 20

The corporate treasury should charge ______ for hedging the currency risk exposures of individual business units within the firm.

A) historical cost prices
B) market prices
C) reservation prices
D) the same price regardless of when the transactions are executed
E) the most that the division can afford

Question 21

The most popular instrument for hedging currency risk is a ______.

A) currency forward
B) currency futures
C) money market hedge
D) currency option
E) currency swap

Question 22

Transaction exposure to currency risk can be effectively hedged with which of the following hedging instruments or strategies?

A) currency forwards or futures
B) leading and lagging
C) international diversification *
D) More than one of the above
E) None of the above

Question 23

Exposures to currency risk that are periodic, long-term, and recurring in nature are usually best hedged with ______.

A) currency compacts
B) currency futures
C) currency options
D) currency straddles
E) currency swaps

Question 24

Financial market hedges include each of a) through d) EXCEPT

A) currency futures
B) currency options
C) money market hedges
D) currency swaps
E) Each of the above can form a financial market hedge of currency risk

Question 25

Internal hedges of currency risk are most likely to be found in ______.

A) diversified multinational corporations
B) domestic corporations
C) exporters
D) government agencies
E) importers

Question 26

A "disaster hedge" against adverse currency movements can be obtained with a ______.

A) currency forward
B) currency future
C) money market hedge
D) currency option
E) currency swap

Question 27

Financial market hedges work best for _______ exposures to currency risk.

A) accounting
B) economic
C) operating
D) transaction
E) translation