Chapter 10: Measuring Exchange Rate Exposure, Exams of Economics

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1. Translation exposure reflects: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations.

ANS: C PTS: 1

2. Transaction exposure reflects: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations.

ANS: A PTS: 1

3. Economic exposure refers to: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations. b. the exposure of a firm's local currency value to transactions between foreign exchange traders. c. the exposure of a firm's financial statements to exchange rate fluctuations. d. the exposure of a firm's cash flows to exchange rate fluctuations. e. the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.

ANS: D PTS: 1

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? a. Diz Co. b. Yanta Co. c. the firms have about the same level of exposure. d. neither firm has any exposure.

ANS: A PTS: 1

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

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ANS: B PTS: 1

6. According to the text, currency variability levels perfectly stable over time, and currency correlations perfectly stable over time. a. are; are not b. are; are c. are not; are not d. are not; are ANS: C PTS: 1
7. Which of the following operations benefits from appreciation of the firm's local currency? a. borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation. b. receiving earnings dividends from foreign subsidiaries. c. purchasing supplies locally rather than overseas. d. exporting to foreign countries.

ANS: A PTS: 1

8. Which of the following operations benefit(s) from depreciation of the firm's local currency? a. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation. b. purchasing foreign supplies. c. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency. d. A and B

ANS: C PTS: 1

9. Economic exposure can affect: a. MNCs only. b. purely domestic firms only. c. A and B d. none of the above

ANS: C PTS: 1

10. Under FASB 52: a. translation gains and losses are included in the reported net income. b. translation gains and losses are included in stockholder's equity. c. A and B d. none of the above

ANS: B PTS: 1

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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. a. strong dollar; favorably b. weak dollar; not c. strong dollar; not

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d. favorably; unfavorably affected

ANS: C PTS: 1

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16. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local currency should: a. increase local sales as it reduces foreign competition in local markets. b. increase the firm's exports denominated in the local currency. c. increase the returns earned on the firm's foreign bank deposits. d. increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. e. none of the above

ANS: E PTS: 1

17. A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm's local currency should: a. decrease local sales as foreign competition in local markets is reduced. b. decrease the firm's exports denominated in the local currency. c. decrease the returns earned on the firm's foreign bank deposits. d. decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. e. none of the above

ANS: E PTS: 1

18. 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. a. positive; interest expenses b. positive; gross profit c. negative; gross profit d. negative; interest expenses

ANS: B PTS: 1

19. 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. negative; positive b. positive; positive c. positive; negative d. negative; negative

ANS: D PTS: 1

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21. Which of the following is not a form of exposure to exchange rate fluctuations? a. transaction exposure. b. credit exposure. c. economic exposure. d. translation exposure.

ANS: B PTS: 1

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? a. $500,000 outflow. b. $500,000 inflow. c. $275,000 inflow. d. $275,000 outflow.

ANS: D SOLUTION: (^) A$1,000,000  A$1,500,000 = A$500,000  $.55 = $275,

PTS: 1

23. 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. a. $3,675,000 outflow b. $525,000 outflow c. $525,000 inflow d. $210,000 outflow

ANS: B SOLUTION: €2,000,000 + €1,500,000 = €500,000  $1.05 = $525,

PTS: 1

24. One argument for exchange rate irrelevance is that: a. MNCs can hedge exchange rate exposure much more effectively than individual investors. b. investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates. c. purchasing power parity does not hold very well. d. MNCs are typically not diversified across numerous countries.

ANS: B PTS: 1

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

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29. Refer to 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. a. (^) $75,750. b. (^) $60,600. c. (^) $111,100. d. (^) $25,250.

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ANS: B

SOLUTION: 0.5%  (1.65  1%) = 1.2%

PTS: 1

30. The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on: a. the expected percentage change in the currency for the next day. b. the standard deviation of the daily percentage changes in the currency over a previous period. c. the current level of interest rates. d. the confidence level used.

ANS: C PTS: 1

Exhibit 10- Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.

31. Refer to Exhibit 10-2. What is the portfolio standard deviation? a. 3.00%. b. 5.44%. c. 17.98%. d. none of the above

ANS: B SOLUTION:

PTS: 1

32. 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. a. 9.00%. b. (^) 30.00%. c. (^) 5.00%.

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SOLUTION:

PTS: 1

33. Appreciation in a firm's local currency causes a(n) in cash inflows and a(n) in cash outflows. a. reduction; reduction b. increase; increase c. increase; reduction d. reduction; increase

ANS: A PTS: 1

34. 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. a. be hurt by; appreciated b. benefit from; depreciated c. be hurt by; depreciated d. none of the above

ANS: C PTS: 1

35. 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. a. greater; smaller b. smaller; greater c. greater; greater d. none of the above

ANS: C PTS: 1

36. Under FASB 52, consolidated earnings are sensitive to the functional currency's weighted average exchange rate. a. True b. False

ANS: T PTS: 1

37. If the U.S. dollar appreciates, an MNC's: a. U.S. sales will probably decrease.

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b. exports denominated in U.S. dollars will probably increase. c. interest owed on foreign funds borrowed will probably increase. d. exports denominated in foreign currencies will probably increase. e. all of the above

ANS: A PTS: 1

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the more recent subperiod.

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c. The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod. d. The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod. e. All of the above are true.

ANS: C PTS: 1

41. 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: a. 5.13%. b. 2.63%. c. 4.33%. d. 5.55%.

ANS: A SOLUTION:

PTS: 1

42. 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: a. 17.28%. b. 13.15%. c. 14.50%. d. 12.04%.

ANS: B SOLUTION:

PTS: 1