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Question 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

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

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

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 (SP_t) and the percentage change
in the peso’s value relative to the dollar (PESO_t). SP_t
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 PESO_t
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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

____ 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

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

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

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

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

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

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.

	negative; positive
	positive; positive
	positive; negative
	negative; negative

	favorably; stronger
	favorably; weaker
	not; stronger
	not; weaker

	transaction exposure.
	credit exposure.
	economic exposure.
	translation exposure.

	favorably; favorably affected but by a smaller degree
	favorably; favorably affected by a higher degree
	unfavorably; favorably affected
	favorably; unfavorably affected

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