Transaction exposure

________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.

• Operating

• Transaction

• Translation

• Accounting

Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates.

• transaction; operating

• operating; transaction

• operating; accounting

• none of the above

Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years.

• accounting; Operating

• operating; Transaction

• transaction; Operating

• transaction; Accounting

Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.

• increase; not change

• decrease; not change

• not change; increase

• not change; not change

Which of the following is NOT cited as a good reason for hedging currency exposures?

• Reduced risk of future cash flows is a good planning tool.

• Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows.

• Currency risk management increases the expected cash flows to the firm

• Management is in a better position to assess firm currency risk than individual investors.

Which of the following is cited as a good reason for NOT hedging currency exposures?

• Shareholders are more capable of diversifying risk than management.

• Currency risk management through hedging does not increase expected cash flows

• Hedging activities are often of greater benefit to management than to shareholders.

• All of the above are cited as reasons NOT to hedge.

Many MNE s manage foreign exchange exposure centrally, thus gains or losses are always matched with the country of origin.

• True

• False

Hedging, or reducing risk, is the same as adding value or return to the firm

• True

• False

The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and actually filling or delivering it. Finally, the time it takes to get paid after delivering the product. In order, these stages of transaction exposure may be identified as:

• backlog, quotation, and billing exposure

• billing, backlog, and quotation exposure.

• quotation, backlog, and billing exposure.

• quotation, billing, and backlog exposure.

A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£, the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. The U.S. firm is at risk today of a loss if:

• the exchange rate changes to $1.52/£.

• the exchange rate changes to $1.58/£.

• the exchange rate doesn't change

• all of the above