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Nov 17th, 2013
SoccerBoss
Category:
Business & Finance
Price: $80 USD

Question description



Question 1






  1.  

    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:

    Answer



    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.


1 points  


Question 2






  1.  

    Transaction exposure
    reflects:

    Answer



    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.


1 points  


Question 3






  1.  

    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:

    Answer



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




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




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




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


1 points  


Question 4






  1.  

    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.

    Answer



    negative;
    positive




    positive;
    positive




    positive;
    negative




    negative;
    negative


1 points  


Question 5






  1.  

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

    Answer



    economic
    exposure.




    translation
    exposure.




    transaction
    exposure.




    no exposure to exchange rate
    fluctuations.


1 points  


Question 6






  1.  

    Translation exposure
    reflects:

    Answer



    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.


1 points  


Question 7






  1.  

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

    Answer



    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.


1 points  


Question 8






  1.  

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

    Answer



    favorably;
    stronger




    favorably;
    weaker




    not;
    stronger




    not;
    weaker


1 points  


Question 9






  1.  

    Economic exposure refers
    to:

    Answer



    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.


1 points  


Question 10






  1.  

    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?

    Answer



    Diz Co.




    Yanta Co.




    the firms have about the same level
    of exposure.




    neither firm has any
    exposure.


1 points  


Question 11






  1.  

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

    Answer



    transaction
    exposure.




    credit
    exposure.




    economic
    exposure.




    translation
    exposure.


1 points  


Question 12






  1.  

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

    Answer



    economic
    exposure.




    transaction
    exposure.




    translation
    exposure.




    economic and transaction
    exposure.


1 points  


Question 13






  1.  

    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.

    Answer



    favorably; favorably affected but
    by a smaller degree




    favorably; favorably affected by a
    higher degree




    unfavorably; favorably
    affected




    favorably; unfavorably
    affected


1 points  


Question 14






  1.  

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

    Answer



    the interest rate in the country of
    the subsidiary.




    proportion of business conducted by
    the subsidiary.




    its accounting
    method.




    the exchange rate movements of the
    subsidiary's currency.


1 points  


Question 15






  1.  

    Lampon Co. is a U.S. firm that has a
    subsidiary in Hong Kong that produces light fixtures and sells them to Japan,
    denominated in Japanese yen. Its subsidiary pays all of its expenses, including
    the cost of goods sold, in U.S. dollars. The Hong Kong dollar is pegged to the
    U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the Hong
    Kong subsidiary's revenue will ____, and its expenses will
    ____.

    Answer



    increase;
    decrease




    decrease; remain
    unchanged




    decrease;
    increase




    increase; remain
    unchanged


1 points  


Question 16






  1.  

    FAI Corporation will be receiving 300,000
    Canadian dollars (C$) in 90 days. Currently, a 90-day call option with an
    exercise price of $0.75 and a premium of $0.01 is available. Also, a 90-day put
    option with an exercise price of $0.73 and a premium of $0.01 is available. FAI
    plans to purchase options to hedge its receivable position. Assuming that the
    spot rate in 90 days is $0.71, what is the net amount received from the currency
    option hedge?

    Answer



    $219,000




    $222,000




    $216,000




    $213,000



1 points  


Question 17






  1.  

    Your company will receive C$600,000 in 90
    days. The 90-day forward rate in the Canadian dollar is $.80. If you use a
    forward hedge, you will:

    Answer



    receive $750,000
    today.




    receive $750,000 in 90
    days.




    pay $750,000 in 90
    days.




    receive $480,000
    today.




    receive $480,000 in 90
    days.


1 points  


Question 18






  1.  

    Assume zero transaction costs. If the 90-day
    forward rate of the euro is an accurate estimate of the spot rate 90 days from
    now, then the real cost of hedging payables will be:

    Answer



    positive.




    negative.




    positive if the forward rate
    exhibits a premium, and negative if the forward rate exhibits a
    discount.




    zero.



1 points  


Question 19






  1.  

    FAB Corporation will need 200,000 Canadian
    dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call
    option with an exercise price of $.75 and a premium of $.01 is available. Also,
    a 90-day put option with an exercise price of $.73 and a premium of $.01 is
    available. FAB plans to purchase options to hedge its payable position. Assuming
    that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB
    wishes to minimize its cost?

    Answer



    $144,000.




    $148,000.




    $152,000.




    $150,000.



1 points  


Question 20






  1.  

    Hanson Corp. frequently uses a forward hedge
    to hedge its British pound (£) payables. For the next quarter, Hanson has
    identified its net exposure to the pound as being £1,000,000. The 90-day forward
    rate is $1.50. Furthermore, Hanson's financial center has indicated that the
    possible values of the British pound at the end of next quarter are $1.57 and
    $1.59, with probabilities of .50 and .50, respectively. Based on this
    information, what is the expected real cost of hedging
    payables?

    Answer



    $80,000.




    −$80,000.




    $1,570,000.




    $1,580,000.



1 points  


Question 21






  1.  

    The real cost of hedging payables with a
    forward contract equals:

    Answer



    the nominal cost of hedging minus
    the nominal cost of not hedging.




    the nominal cost of not hedging
    minus the nominal cost of hedging.




    the nominal cost of hedging
    divided by the nominal cost of not hedging.




    the nominal cost of not hedging
    divided by the nominal cost of
    hedging.


1 points  


Question 22






  1.  

    If interest rate parity exists and
    transactions costs are zero, the hedging of payables in euros with a forward
    hedge will ____.

    Answer



    have the same result as a call
    option hedge on payables




    have the same result as a put
    option hedge on payables




    have the same result as a money
    market hedge on payables




    require more dollars than a money
    market hedge


1 points  


Question 23






  1.  

    A money market hedge on payables would
    involve, among others, borrowing ____ and investing in the
    ____.

    Answer



    the foreign currency;
    U.S.




    the foreign currency; foreign
    country




    dollars; foreign
    country




    dollars;
    U.S.


1 points  


Question 24






  1.  

    Mender Co. will be receiving 500,000
    Australian dollars in 180 days. Currently, a 180-day call option with an
    exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put
    option with an exercise price of $.66 and a premium of $.02 is available. Mender
    plans to purchase options to hedge its receivables position. Assuming that the
    spot rate in 180 days is $.67, what is the amount received from the currency
    option hedge (after considering the premium paid)?

    Answer



    $330,000




    $325,000




    $320,000




    $340,000



1 points  


Question 25






  1.  

    If Lazer Co. desired to lock in the maximum
    it would have to pay for its net payables in euros but wanted to be able to
    capitalize if the euro depreciates substantially against the dollar by the time
    payment is to be made, the most appropriate hedge would
    be:

    Answer



    a money market
    hedge.




    purchasing euro put
    options.




    a forward purchase of
    euros.




    purchasing euro call
    options.




    selling euro call
    options.


1 points  


Question 26






  1.  

    Blake Inc. needs €1,000,000 in 30 days. It
    can earn 5 percent annualized on a German security. The current spot rate for
    the euro is $1.00. Blake can borrow funds in the U.S. at an annualized interest
    rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what
    is the cost of implementing the hedge?

    Answer



    $1,000,000.




    $1,055,602.




    $1,000,830.




    $1,045,644.



1 points  


Question 27






  1.  

    Foghat Co. has 1,000,000 euros as receivables
    due in 30 days, and is certain that the euro will depreciate substantially over
    time. Assuming that the firm is correct, the ideal strategy is
    to:

    Answer



    sell euros
    forward.




    purchase euro currency put
    options.




    purchase euro currency call
    options.




    purchase euros
    forward.




    remain
    unhedged.


1 points  


Question 28






  1.  

    Celine Co. will need €500,000 in 90 days to
    pay for German imports. Today's 90-day forward rate of the euro is $1.07. There
    is a 40 percent chance that the spot rate of the euro in 90 days will be $1.02,
    and a 60 percent chance that the spot rate of the euro in 90 days will be $1.09.
    Based on this information, the expected value of the real cost of hedging
    payables is $____.

    Answer



    −35,000




    25,000




    −1,000




    1,000



1 points  


Question 29






  1.  

    Which of the following is the least effective
    way of hedging exposure in the long run?

    Answer



    long-term forward
    contract.




    currency
    swap.




    parallel
    loan.




    money market
    hedge.


1 points  


Question 30






  1.  

    The ____ hedge is not a technique to
    eliminate transaction exposure discussed in your
    text.

    Answer



    index




    futures




    forward




    money
    market




    currency
    option


1 points  


Question 31






  1.  

    With regard to hedging translation exposure,
    translation losses ____, and gains on forward contracts used to hedge
    translation exposure ____.

    Answer



    are not tax deductible; are
    taxed




    are tax deductible; are
    taxed




    are not tax deductible; are not
    taxed




    are tax deductible; are not
    taxed


1 points  


Question 32






  1.  

    Orlando Co. produces home appliances and
    sells them in the U.S. It outsources the production of the appliances to a
    Chinese manufacturer, and the imported appliances are priced in dollars. Its
    major competitor for appliances is located in Mexico. Based on this information,
    Orlando Co. is subject to ____ exposure.

    Answer



    economic




    transaction




    translation




    economic and
    transaction


1 points  


Question 33






  1.  

    If the Singapore dollar appreciates against
    the U.S. dollar over this year, the consolidated earnings of a U.S. company with
    a subsidiary in Singapore will be ____ as a result of the exchange rate
    movement.

    Answer



    negative




    adversely
    affected




    favorably
    affected




    unaffected



1 points  


Question 34






  1.  

    Mercury Co. has a subsidiary based in Italy
    and is exposed to translation exposure. Mercury forecasts that its earnings next
    year will be €10 million. Mercury decides to hedge the expected earnings by
    selling €10 million forward. During the next year, the euro appreciated.
    Mercury's consolidated earnings were ____ affected by the euro's movement, and
    Mercury's hedge position was ____ affected by the euro's
    movement.

    Answer



    favorably;
    favorably




    favorably;
    adversely




    adversely;
    favorably




    adversely;
    adversely


1 points  


Question 35






  1.  

    If a U.S. firm has much more revenue than
    expenses denominated in euros, the firm will likely ____ if the euro
    ____.

    Answer



    benefit;
    weakens




    be unaffected;
    weakens




    be unaffected;
    strengthens




    benefit;
    strengthens


1 points  


Question 36






  1.  

    Sycamore (a U.S. firm) has no subsidiaries
    and presently has sales to Mexican customers amounting to MXP98 million, while
    its peso-denominated expenses amount to MXP41 million. If it shifts its material
    orders from its Mexican suppliers to U.S. suppliers, it could reduce
    peso-denominated expenses by MXP12 million and increase dollar-denominated
    expenses by $800,000. This strategy would ____ the Sycamore's exposure to
    changes in the peso's movements against the U.S. dollar. Regardless of whether
    the firm shifts expenses, it is likely to perform better when the peso is valued
    ____ relative to the dollar.

    Answer



    reduce;
    high




    reduce;
    low




    increase;
    low




    increase;
    high


1 points  


Question 37






  1.  

    Depreciation of the euro relative to the U.S.
    dollar will cause a U.S.-based multinational firm's reported earnings (from the
    consolidated income statement) to ____. If a firm desired to protect against
    this possibility, it could stabilize its reported earnings by ____ euros forward
    in the foreign exchange market.

    Answer



    be reduced;
    purchasing




    be reduced;
    selling




    increase;
    selling




    increase;
    purchasing


1 points  


Question 38






  1.  

    Assume that Atlanta Co. is producing
    motorcycles and selling them to U.S. customers. Atlanta Co. obtains all of its
    supplies from American firms and has no competition in the U.S. It has one major
    competitor in Japan. Now assume that Phoenix Co. is producing office furniture
    and obtains its supplies from a Canadian firm. Based on this information,
    Atlanta Co. has ____ exposure and Phoenix Co. has ____
    exposure.

    Answer



    transaction;
    translation




    translation;
    transaction




    economic;
    transaction




    economic;
    translation


1 points  


Question 39






  1.  

    ____ is (are) not a limitation of hedging
    translation exposure.

    Answer



    Inaccurate stock price
    forecasts




    Inadequate forward contracts for
    some currencies




    Taxation on gains from forward
    contracts




    Increased transaction
    exposure


1 points  


Question 40






  1.  

    If a U.S. firm's expenses are more
    susceptible to exchange rate movements than revenue, the firm will ____ if the
    dollar ____.

    Answer



    benefit;
    weakens




    be unaffected;
    weakens




    be unaffected;
    strengthens




    benefit;
    strengthens


1 points  


Question 41






  1.  

    Translation losses are ____, while gains on
    forward contracts used to hedge translation exposure are
    ____.

    Answer



    tax deductible; not
    taxed




    not tax deductible; not
    taxed




    not tax deductible;
    taxed




    tax deductible;
    taxed


1 points  


Question 42






  1.  

    Which of the following is an example of
    economic exposure but not an example of transaction
    exposure?

    Answer



    An increase in the dollar's value
    hurts a U.S. firm's domestic sales because foreign competitors are able to
    increase their sales to U.S. customers.




    An increase in the pound's value
    increases the U.S. firm's cost of British pound
    payables.




    A decrease in the peso's value
    decreases a U.S. firm's dollar value of peso
    receivables.




    A decrease in the Swiss franc's
    value decreases the dollar value of interest payments on a Swiss deposit sent to
    a U.S. firm by a Swiss bank.



1 points  


Question 43






  1.  

    Sarakose Co. is a U.S. company with sales to
    Canada amounting to C$5 million. Its cost of materials attributable to the
    purchase of Canadian goods is C$7 million. Its interest expense on Canadian
    loans is C$5 million. The dollar value of Sarakose's "earnings before interest
    and taxes" would ____ if the Canadian dollar appreciates; the dollar value of
    its cash flows would ____ if the Canadian dollar
    appreciates.

    Answer



    increase;
    increase




    decrease;
    increase




    decrease;
    decrease




    increase;
    decrease




    increase; be
    unaffected


1 points  


Question 44






  1.  

    Wisconsin Inc. conducts business in Zambia.
    Years ago, Wisconsin established a subsidiary in Zambia that has consistently
    generated very large profits denominated in Zambian kwacha. Wisconsin wishes to
    restructure its operations to reduce economic exposure. Which of the following
    is not a feasible way of accomplishing this?

    Answer



    increase Zambian supply
    orders.




    increase Zambian
    sales.




    restructure debt to increase debt
    payments in Zambia.




    reduce Zambian
    sales.


1 points  


Question 45






  1.  

    Assume that a Japanese car manufacturer
    exports cars to U.S. dealerships, which are priced in yen. The demand for those
    cars declines when the yen is strong. The manufacturer also produces some cars
    in the U.S. with U.S. materials and those cars are priced in dollars. The
    manufacturer could reduce its economic exposure by:

    Answer



    closing down most of its plants in
    the U.S.




    producing more automobiles in the
    U.S.




    relying completely on Japanese
    suppliers for its parts.




    pricing its exports in
    dollars.

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School: Rice University
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