Description
Question 1
AnswerMagent 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.
1 points
Question 2
AnswerTransaction 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.
1 points
Question 3
AnswerYomance 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: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
AnswerAssume 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.negative;
positivepositive;
positivepositive;
negativenegative;
negative
1 points
Question 5
AnswerU.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:economic
exposure.translation
exposure.transaction
exposure.no exposure to exchange rate
fluctuations.
1 points
Question 6
AnswerTranslation 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.
1 points
Question 7
AnswerWhich 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.
1 points
Question 8
AnswerGenerally, MNCs with less foreign revenues
than foreign costs will be ____ affected by a ____ foreign
currency.favorably;
strongerfavorably;
weakernot;
strongernot;
weaker
1 points
Question 9
AnswerEconomic 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.
1 points
Question 10
AnswerDiz 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.
1 points
Question 11
AnswerWhich of the following is not a form of
exposure to exchange rate fluctuations?transaction
exposure.credit
exposure.economic
exposure.translation
exposure.
1 points
Question 12
AnswerVada, Inc. exports computers to Australia
invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is
subject to:economic
exposure.transaction
exposure.translation
exposure.economic and transaction
exposure.
1 points
Question 13
AnswerWhen 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 degreefavorably; favorably affected by a
higher degreeunfavorably; favorably
affectedfavorably; unfavorably
affected
1 points
Question 14
AnswerVermont Co. has one foreign subsidiary. Its
translation exposure is directly affected by each of the following,
except: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
AnswerLampon 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
____.increase;
decreasedecrease; remain
unchangeddecrease;
increaseincrease; remain
unchanged
1 points
Question 16
AnswerFAI 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?$219,000
$222,000
$216,000
$213,000
1 points
Question 17
AnswerYour 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:receive $750,000
today.receive $750,000 in 90
days.pay $750,000 in 90
days.receive $480,000
today.receive $480,000 in 90
days.
1 points
Question 18
AnswerAssume zero transaction costs. If the 90-day
forward rate of the euro is an accurate estimate of the spot rate 90 days from
now, then the real cost of hedging payables will be:positive.
negative.
positive if the forward rate
exhibits a premium, and negative if the forward rate exhibits a
discount.zero.
1 points
Question 19
AnswerFAB Corporation will need 200,000 Canadian
dollars (C$) 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?$144,000.
$148,000.
$152,000.
$150,000.
1 points
Question 20
AnswerHanson 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?$80,000.
−$80,000.
$1,570,000.
$1,580,000.
1 points
Question 21
AnswerThe real cost of hedging payables with a
forward contract equals: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
AnswerIf interest rate parity exists and
transactions costs are zero, the hedging of payables in euros with a forward
hedge will ____.have the same result as a call
option hedge on payableshave the same result as a put
option hedge on payableshave the same result as a money
market hedge on payablesrequire more dollars than a money
market hedge
1 points
Question 23
AnswerA money market hedge on payables would
involve, among others, borrowing ____ and investing in the
____.the foreign currency;
U.S.the foreign currency; foreign
countrydollars; foreign
countrydollars;
U.S.
1 points
Question 24
AnswerMender 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)?$330,000
$325,000
$320,000
$340,000
1 points
Question 25
AnswerIf 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: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
AnswerBlake 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?$1,000,000.
$1,055,602.
$1,000,830.
$1,045,644.
1 points
Question 27
AnswerFoghat 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:sell euros
forward.purchase euro currency put
options.purchase euro currency call
options.purchase euros
forward.remain
unhedged.
1 points
Question 28
AnswerCeline 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 $____.−35,000
25,000
−1,000
1,000
1 points
Question 29
AnswerWhich of the following is the least effective
way of hedging exposure in the long run?long-term forward
contract.currency
swap.parallel
loan.money market
hedge.
1 points
Question 30
AnswerThe ____ hedge is not a technique to
eliminate transaction exposure discussed in your
text.index
futures
forward
money
marketcurrency
option
1 points
Question 31
AnswerWith regard to hedging translation exposure,
translation losses ____, and gains on forward contracts used to hedge
translation exposure ____.are not tax deductible; are
taxedare tax deductible; are
taxedare not tax deductible; are not
taxedare tax deductible; are not
taxed
1 points
Question 32
AnswerOrlando 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.economic
transaction
translation
economic and
transaction
1 points
Question 33
AnswerIf 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.negative
adversely
affectedfavorably
affectedunaffected
1 points
Question 34
AnswerMercury 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.favorably;
favorablyfavorably;
adverselyadversely;
favorablyadversely;
adversely
1 points
Question 35
AnswerIf a U.S. firm has much more revenue than
expenses denominated in euros, the firm will likely ____ if the euro
____.benefit;
weakensbe unaffected;
weakensbe unaffected;
strengthensbenefit;
strengthens
1 points
Question 36
AnswerSycamore (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.reduce;
highreduce;
lowincrease;
lowincrease;
high
1 points
Question 37
AnswerDepreciation 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.be reduced;
purchasingbe reduced;
sellingincrease;
sellingincrease;
purchasing
1 points
Question 38
AnswerAssume 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.transaction;
translationtranslation;
transactioneconomic;
transactioneconomic;
translation
1 points
Question 39
Answer____ is (are) not a limitation of hedging
translation exposure.Inaccurate stock price
forecastsInadequate forward contracts for
some currenciesTaxation on gains from forward
contractsIncreased transaction
exposure
1 points
Question 40
AnswerIf a U.S. firm's expenses are more
susceptible to exchange rate movements than revenue, the firm will ____ if the
dollar ____.benefit;
weakensbe unaffected;
weakensbe unaffected;
strengthensbenefit;
strengthens
1 points
Question 41
AnswerTranslation losses are ____, while gains on
forward contracts used to hedge translation exposure are
____.tax deductible; not
taxednot tax deductible; not
taxednot tax deductible;
taxedtax deductible;
taxed
1 points
Question 42
AnswerWhich of the following is an example of
economic exposure but not an example of transaction
exposure?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
AnswerSarakose 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.increase;
increasedecrease;
increasedecrease;
decreaseincrease;
decreaseincrease; be
unaffected
1 points
Question 44
AnswerWisconsin 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?increase Zambian supply
orders.increase Zambian
sales.restructure debt to increase debt
payments in Zambia.reduce Zambian
sales.
1 points
Question 45
AnswerAssume 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: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.