Transaction exposure reflects:

Economic exposure refers to:

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?

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?

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

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

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

Economic exposure can affect:

Under FASB 52:

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.

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 ___.

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:

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

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.

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

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

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

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 ______.

Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in its stock price (SPₜ) and the percentage change in the peso's value relative to the dollar (PESOₜ). SPₜ is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESOₜ variable would be ______ in the first subperiod and ______ in the second subperiod.

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

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

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?

Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05.

One argument for exchange rate irrelevance is that:

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

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 ______.

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.

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

[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.

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

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

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.

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

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.

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.

Under FASB 52:

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

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:

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

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?

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:

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:

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

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.

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

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

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

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

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

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

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

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.

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.

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

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.

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

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

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

A reduction in hedging will probably reduce transaction exposure.

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

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

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.

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

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.

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

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 ___.

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:

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

If a U.S. firm's cost of goods sold in Switzerland is much greater than its sales in Switzerland, the appreciation of the Swiss franc has a ______ impact on the firm's ______.

If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the Australian dollar has a ______ impact on the firm's ______.

U.S.-based Majestic Co. sells products to U.S. consumers and purchases all materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:

Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected by each of the following, **except**:

Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €250,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Using the VAR method (95% confidence level), what is the maximum one-month loss in dollars?

Jensen Co. expects to pay €50,000 in one month for imports and receive €200,000 for exports. Using the VAR method (97.5% confidence level), what is the maximum one-month loss?

Lazer Co. exports computers to Belgium (euros), Italy (dollars), and has a subsidiary in Korea. Lazer is subject to:

Lampon Co.'s Hong Kong subsidiary sells fixtures to Japan (yen) and pays expenses in USD. If the yen appreciates against the dollar, the subsidiary's revenue will _____, and expenses will _____.

If the Japanese yen is expected to depreciate and a U.S. MNC's subsidiary in Japan has costs exceeding revenues, the MNC's value will _____.

If net inflows and outflows in two currencies offset each other, the firm benefits if the currencies are negatively correlated.

A purely domestic firm is never exposed to exchange rate fluctuations.

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

Currency correlations are generally negative.

Dollar cash flows from two foreign inflow currencies are less volatile if their individual standard deviations are lower.

The maximum one-day loss estimated using VAR is independent of the confidence level.

The degree to which a firm's future cash flows are influenced by exchange rates is referred to as transaction exposure.

Which is **not** true regarding currency correlations?

If the U.S. dollar appreciates:

Which is **not** true about economic exposure?