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

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

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

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

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

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:

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

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

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

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

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.

favorably; favorably affected but by a smaller degree

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

unfavorably; favorably affected

favorably; favorably affected but by a smaller degree

favorably; favorably affected by a higher degree

favorably; unfavorably affected

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

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

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

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

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

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

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

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

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

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

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 ______.

negative; gross profit less expenses

One argument for exchange rate irrelevance is that:

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

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

purchasing power parity does not hold very well.

MNCs are typically not diversified across numerous countries.

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

the current level of interest rates.

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

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

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

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

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

U.S. sales will probably decrease.

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

interest owed on foreign funds borrowed will probably increase.

exports denominated in foreign currencies will probably increase.

Assume that Mill Corporation, a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements: PCF_i = a_0 + a_1 e_i + μ_i The regression model estimates a coefficient of a_1 of 2. This indicates that:

if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%.

if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%.

if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%.

if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%.

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

The local (domestic) earnings of the MNC

The MNC's degree of foreign involvement

The locations of foreign subsidiaries

The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD): PCF_i = a_0 + a_1 e_i + μ_i Based on the results, which of the following statements is probably not true?

The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.

The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod.

The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.

The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.

c1000

Quiz

•

Mathematics

•

University

•

Practice Problem

•

Hard

Lan Anh

Used 1+ times

FREE Resource

90 questions

Show all answers

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Translation exposure reflects:

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

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

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

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

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Transaction exposure reflects:

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

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

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

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

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Economic exposure refers to:

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

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

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

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

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

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

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?

Diz Co.

Yanta Co.

the firms have about the same level of exposure.

neither firm has any exposure.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

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?

Jacko Co.

Kriner Co.

the firms have about the same level of exposure.

neither firm has any exposure.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

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

are; are not

are; are

are not; are not

are not; are

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

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

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

receiving earnings dividends from foreign subsidiaries.

purchasing supplies locally rather than overseas.

exporting to foreign countries.

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