Quiz about c1000

Question 1

Translation exposure reflects:

Accepted Answer

the exposure of a firm's financial statements to exchange rate fluctuations.

Answer

the exposure of a firm's international contractual transactions to exchange rate fluctuations.

Answer

the exposure of a firm's local currency value to transactions between foreign exchange traders.

Answer

the exposure of a firm's cash flows to exchange rate fluctuations.

Question 2

Transaction exposure reflects:

Accepted Answer

the exposure of a firm's international contractual transactions to exchange rate fluctuations.

Answer

the exposure of a firm's local currency value to transactions between foreign exchange traders.

Answer

the exposure of a firm's financial statements to exchange rate fluctuations.

Answer

the exposure of a firm's cash flows to exchange rate fluctuations.

Question 3

Economic exposure refers to:

Accepted Answer

the exposure of a firm's cash flows to exchange rate fluctuations.

Answer

the exposure of a firm's international contractual transactions to exchange rate fluctuations.

Answer

the exposure of a firm's local currency value to transactions between foreign exchange traders.

Answer

the exposure of a firm's financial statements to exchange rate fluctuations.

Answer

the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.

Question 4

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?

Accepted Answer

Diz Co.

Answer

Yanta Co.

Answer

the firms have about the same level of exposure.

Answer

neither firm has any exposure.

Question 5

Jacko Co. is a U.S.-based MNC with net cash inflows of euros 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?

Accepted Answer

Kriner Co.

Answer

Jacko Co.

Answer

the firms have about the same level of exposure.

Answer

neither firm has any exposure.

Question 6

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

Accepted Answer

are not; are not

Answer

are; are not

Answer

are; are

Answer

are not; are

Question 7

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

Accepted Answer

borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.

Answer

receiving earnings dividends from foreign subsidiaries.

Answer

purchasing supplies locally rather than overseas.

Answer

exporting to foreign countries.

Question 8

Which of the following operations benefit(s) from depreciation of the firm's local currency?

Accepted Answer

investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.

Answer

borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.

Answer

purchasing foreign supplies.

Answer

A and B

Question 9

Economic exposure can affect:

Accepted Answer

A and B

Answer

MNCs only.

Answer

purely domestic firms only.

Answer

none of the above

Question 10

Under FASB 52:

Accepted Answer

translation gains and losses are included in stockholder's equity.

Answer

translation gains and losses are included in the reported net income.

Answer

A and B

Answer

none of the above

Question 11

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.

Accepted Answer

strong dollar; favorably

Answer

weak dollar; not

Answer

strong dollar; not

Answer

weak dollar; favorably

Question 12

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 ___.

Accepted Answer

weak; somewhat stable

Answer

weak; favorably affected

Answer

weak; adversely affected

Answer

none of the above

Question 13

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:

Accepted Answer

benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.

Answer

benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.

Answer

be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.

Answer

be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

Question 14

Generally, MNCs with less foreign costs than foreign revenues will be ______ affected by a ______ foreign currency.

Accepted Answer

favorably; stronger

Answer

not; stronger

Answer

favorably; weaker

Answer

not; weaker

Answer

B and D

Question 15

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.

Accepted Answer

favorably; favorably affected but by a smaller degree

Answer

favorably; favo

Question 16

re ______ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are ______ affected.

Accepted Answer

unfavorably; favorably affected

Answer

favorably; favorably affected but by a smaller degree

Answer

favorably; favorably affected by a higher degree

Answer

favorably; unfavorably affected

Question 17

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

Accepted Answer

none of the above

Answer

increase local sales as it reduces foreign competition in local markets.

Answer

increase the firm's exports denominated in the local currency.

Answer

increase the returns earned on the firm's foreign bank deposits.

Answer

increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency.

Question 18

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

Accepted Answer

none of the above

Answer

decrease local sales as foreign competition in local markets is reduced.

Answer

decrease the firm's exports denominated in the local currency.

Answer

decrease the returns earned on the firm's foreign bank deposits.

Answer

decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency.

Question 19

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 ______.

Accepted Answer

positive; gross profit

Answer

positive; interest expenses

Answer

negative; gross profit less expenses

Answer

negative; interest expenses

Question 20

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

Accepted Answer

False

Answer

True

Question 21

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

Accepted Answer

credit exposure.

Answer

transaction exposure.

Answer

economic exposure.

Answer

translation exposure.

Question 22

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?

Accepted Answer

$275,000 outflow.

Answer

$500,000 outflow.

Answer

$500,000 inflow.

Answer

$275,000 inflow.

Question 23

One argument for exchange rate irrelevance is that:

Accepted Answer

investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates.

Answer

MNCs can hedge exchange rate exposure much more effectively than individual investors.

Answer

purchasing power parity does not hold very well.

Answer

MNCs are typically not diversified across numerous countries.

Question 24

______ exposure is the degree to which the value of contractual transactions can be affected by exchange rate fluctuations.

Accepted Answer

Transaction

Answer

Economic

Answer

Translation

Answer

None of the above

Question 25

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 ______.

Accepted Answer

negatively; low

Answer

negatively; high

Answer

positively; low

Answer

none of the above

Question 26

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 ______ if the two currencies are ______ correlated.

Accepted Answer

high; negatively

Answer

high; positively

Answer

low; negatively

Answer

none of the above

Question 27

[From Exhibit 10-1] What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?

Accepted Answer

-1.2%

Answer

-0.5%

Answer

-2.2%

Answer

-1.5%

Question 28

[From Exhibit 10-1] 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.

Accepted Answer

-$60,600

Answer

-$75,750

Answer

-$111,100

Answer

-$25,250

Question 29

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

Accepted Answer

the current level of interest rates.

Answer

the expected percentage change in the currency for the next day.

Answer

the standard deviation of the daily percentage changes in the currency over a previous period.

Answer

the confidence level used.

Question 30

Refer to Exhibit 10-2. What is the portfolio standard deviation?

Accepted Answer

5.44%.

Answer

3.00%.

Answer

17.98%.

Answer

none of the above

Question 31

Refer to Exhibit 10-2. 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.

Accepted Answer

-9.00%.

Answer

-30.00%.

Answer

-5.00%.

Answer

none of the above

Question 32

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

Accepted Answer

reduction; reduction

Answer

increase; increase

Answer

increase; reduction

Answer

reduction; increase

Question 33

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.

Accepted Answer

be hurt by; depreciated

Answer

be hurt by; appreciated

Answer

benefit from; depreciated

Answer

none of the above

Question 34

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.

Accepted Answer

greater; greater

Answer

greater; smaller

Answer

smaller; greater

Answer

none of the above

Question 35

Under FASB 52:

Accepted Answer

translation gains and losses are included in stockholder's equity.

Answer

translation gains and losses are included in the reported net income.

Answer

A and B

Answer

none of the above

Question 36

If the U.S. dollar appreciates, an MNC's:

Accepted Answer

U.S. sales will probably decrease.

Answer

exports denominated in U.S. dollars will probably increase.

Answer

interest owed on foreign funds borrowed will probably increase.

Answer

exports denominated in foreign currencies will probably increase.

Answer

all of the above

Question 37

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

Accepted Answer

The local (domestic) earnings of the MNC

Answer

The MNC's degree of foreign involvement

Answer

The locations of foreign subsidiaries

Answer

The accounting methods used

Question 38

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:

Accepted Answer

5.13%

Answer

2.63%

Answer

4.33%

Answer

5.55%

Question 39

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:

Accepted Answer

13.15%.

Answer

17.28%.

Answer

14.50%.

Answer

12.04%.

Question 40

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

Accepted Answer

True

Answer

False

Question 41

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.

Accepted Answer

True

Answer

False

Question 42

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

Accepted Answer

False

Answer

True

Question 43

Two highly negatively correlated currencies move in tandem almost as if they are the same currency.

Accepted Answer

False

Answer

True

Question 44

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

Accepted Answer

False

Answer

True

Question 45

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

Accepted Answer

True

Answer

False

Question 46

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

Accepted Answer

True

Answer

False

Question 47

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

Accepted Answer

True

Answer

False

Question 48

An MNC can avoid translation exposure if its earnings are not remitted by the foreign subsidiary to the parent.

Accepted Answer

False

Answer

True

Question 49

Assume a regression model in which the dependent variable is the firm's stock price percentage change, and the independent variable is percentage change in the foreign currency. The coefficient is negative. This implies that the company's stock price increases if the foreign currency appreciates.

Accepted Answer

False

Answer

True

Question 50

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.

Accepted Answer

True

Answer

False

Question 51

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

Accepted Answer

True

Answer

False

Question 52

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.

Accepted Answer

True

Answer

False

Question 53

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

Accepted Answer

False

Answer

True

Question 54

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

Accepted Answer

False

Answer

True

Question 55

In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries.

Accepted Answer

True

Answer

False

Question 56

A reduction in hedging will probably reduce transaction exposure.

Accepted Answer

False

Answer

True

Question 57

The VAR method presumes that the distribution of exchange rate movements is normal.

Accepted Answer

True

Answer

False

Question 58

The VAR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.

Accepted Answer

False

Answer

True

Question 59

If exchange rate movements are less volatile in the past than in the future, the estimated maximum expected loss derived from the VAR method will be underestimated.

Accepted Answer

True

Answer

False

Question 60

Some MNCs are subject to economic exposure without being subject to transaction exposure.

Accepted Answer

True

Answer

False

Question 61

If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to hedge its position in that currency would increase the MNC's overall exposure.

Accepted Answer

True

Answer

False

Question 62

Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:

Accepted Answer

economic exposure.

Answer

transaction exposure.

Answer

translation exposure.

Answer

economic and transaction exposure.

Question 63

Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for the next several years. If the Japanese yen appreciates, its imports from Japan will probably ___ and if the Japanese yen depreciates, its imports from Japan will probably ___.

Accepted Answer

stay the same; stay the same

Answer

increase; decrease

Answer

decrease; increase

Answer

increase; stay the same

Question 64

Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is $.012 while the present exchange rate of the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will:

Accepted Answer

benefit, because the dollar value of its pound position exceeds the dollar value of its yen position.

Answer

benefit, because the dollar value of its yen position exceeds the dollar value of its pound position.

Answer

be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position.

Answer

be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.

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