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 (SPt) and the percentage change in the peso’s value relative to the dollar (PESOt). SPtis 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 PESOtvariable would be ____ in the first subperiod and ____ in the second subperiod.Answer negative; positivepositive; positivepositive; negativenegative; negative1 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; strongerfavorably; weakernot; strongernot; weaker1 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 degreefavorably; favorably affected by a higher degreeunfavorably; favorably affectedfavorably; unfavorably affected1 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; decreasedecrease; remain unchangeddecrease; increaseincrease; remain unchanged1 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$213,0001 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 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 hedge1 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 countrydollars; foreign countrydollars; 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$340,0001 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 −35,00025,000−1,0001,0001 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 indexfuturesforwardmoney marketcurrency option1 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 taxedare tax deductible; are taxedare not tax deductible; are not taxedare tax deductible; are not taxed1 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 economictransactiontranslationeconomic and transaction1 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 negativeadversely affectedfavorably affectedunaffected1 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; favorablyfavorably; adverselyadversely; favorablyadversely; adversely1 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; weakensbe unaffected; weakensbe unaffected; strengthensbenefit; strengthens1 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; highreduce; lowincrease; lowincrease; high1 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; purchasingbe reduced; sellingincrease; sellingincrease; purchasing1 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; translationtranslation; transactioneconomic; transactioneconomic; translation1 points Question 39 ____ is (are) not a limitation of hedging translation exposure.Answer Inaccurate stock price forecastsInadequate forward contracts for some currenciesTaxation on gains from forward contractsIncreased transaction exposure1 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; weakensbe unaffected; weakensbe unaffected; strengthensbenefit; strengthens1 points Question 41 Translation losses are ____, while gains on forward contracts used to hedge translation exposure are ____.Answer tax deductible; not taxednot tax deductible; not taxednot tax deductible; taxedtax deductible; taxed1 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; increasedecrease; increasedecrease; decreaseincrease; decreaseincrease; be unaffected1 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.
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