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| 1 | |
Economic exposure measures |
| | A) | The extent to which the value of the firm is affected by anticipated changes in exchange rates. |
| | B) | The extent to which the value of the firm will be affected by unexpected changes in exchange rates. |
| | C) | The affect of changes in exchange rates will have on the consolidated financial reports of a MNC. |
| | D) | The affect of unanticipated changes in exchange rates on the value of contractual obligations denominated in a foreign currency. |
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| 2 | |
Operating exposure measures |
| | A) | The extent to which the foreign currency value of the firm's assets is affected by unanticipated changes in exchange rates. |
| | B) | The extent to which the firm's operating cash flows will be affected by unexpected changes in exchange rates. |
| | C) | The affect of changes in exchange rates will have on the consolidated financial reports of a MNC. |
| | D) | The affect of unanticipated changes in exchange rates on the dollar value of contractual obligations denominated in a foreign currency. |
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| 3 | |
A firm with a highly elastic demand for its products |
| | A) | Will be unable to pass increased costs following unfavorable changes in the exchange rate without significantly lowering the quantity sold. |
| | B) | Will be able to raise prices following unfavorable changes in the exchange rate without significantly lowering the quantity sold. |
| | C) | Can easily pass increased costs on to consumers. |
| | D) | Will sell about the same amount of product regardless of price. |
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| 4 | |
Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity, suppose there are only three states of the world and each state is equally likely to occur. The future local currency price of this British asset (P*) as well as the future exchange rate (S) will be determined, depending on the realized state of the world.
| State | Probability | P* | S | SxP* | | 1 | 1/3 | £980 | $1.40/£ | $1,372 | | 2 | 1/3 | £1,000 | $1.50/£ | $1,500 | | 3 | 1/3 | £1,070 | $1.60/£ | $1,712 |
Which of the following statements is most correct? |
| | A) | The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated. |
| | B) | The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated. |
| | C) | The firm's exchange rate exposure can be completely hedged with derivatives written on the British pound. |
| | D) | Since randomness is involved, no hedging is possible. |
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| 5 | |
Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity, suppose there are only three states of the world and each state is equally likely to occur. The future local currency price of this British asset (P*) as well as the future exchange rate (S) will be determined, depending on the realized state of the world.
| State | Probability | P* | S | SxP* | | 1 | 1/3 | £1,000 | $1.40/£ | $1,400 | | 2 | 1/3 | £1,000 | $1.50/£ | $1,500 | | 3 | 1/3 | £1,000 | $1.60/£ | $1,600 |
Which of the following statements is most correct? |
| | A) | The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated. |
| | B) | The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated. |
| | C) | The firm's exchange rate exposure can be completely hedged with derivatives written on the British pound. |
| | D) | Since randomness is involved, no hedging is possible. |
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| 6 | |
Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity, suppose there are only three states of the world and each state is equally likely to occur. The future local currency price of this British asset (P*) as well as the future exchange rate (S) will be determined, depending on the realized state of the world.
| State | Probability | P* | S | SxP* | | 1 | 1/3 | £1,000 | $1.40/£ | $1,400 | | 2 | 1/3 | £1,933 | $1.50/£ | $1,400 | | 3 | 1/3 | £1,875 | $1.60/£ | $1,400 |
Which of the following statements is most correct? |
| | A) | The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated. |
| | B) | The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated. |
| | C) | The firm's exchange rate exposure can be completely hedged with derivatives written on the British pound. |
| | D) | Since randomness is involved, no hedging is possible. |
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| 7 | |
With regard to operational hedging versus financial hedging |
| | A) | Operational hedging provides a more stable long-term approach than does financial hedging. |
| | B) | Financial hedging, when instituted on a rollover basis, is a superior long-term approach to operational hedging. |
| | C) | Since they both have the same goal, stabilizing the firm's cash flows in domestic currency, they are fungible in use. |
| | D) | None of the above statements are correct. |
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| 8 | |
Which of the following are identified by your text as a strategy for managing operating exposure:
- Selecting low-cost production sites
- Flexible sourcing policy
- Diversification of the market.
- Product differentiation and R & D efforts
- Financial Hedging
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| | A) | 1), 3), and 5) only |
| | B) | 2) and 4) only |
| | C) | 1), 4), and 5) only |
| | D) | 1), 2), 3), 4), and 5). |
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| 9 | |
If the domestic currency is strong or expected to become strong: |
| | A) | A firm can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or underpriced factors of production. |
| | B) | A firm should curtail R & D efforts until the exchange rate situation improves. |
| | C) | A firm should abandon international sales and focus on domestic market share. |
| | D) | The firm should focus on profiting in the currency futures market based on its forecasts. |
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| 10 | |
A purely domestic firm that sources and sells only domestically, |
| | A) | Faces exchange rate risk to the extent that it has international competitors in the domestic market. |
| | B) | Faces no exchange rate risk. |
| | C) | Should never hedge since this could actually increase its currency exposure. |
| | D) | b) and c) are both correct. |
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