Multinational Business Finance 13th Edition Test Bank Chapter 12

subject Type Homework Help
subject Pages 9
subject Words 3961
subject Authors Arthur I. Stonehill, David K. Eiteman, Michael H. Moffett

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 12
Operating Exposure 12.1 Trident Corporation: A Multinationals Operating Exposure
Multiple Choice Question: Another name for operating exposure is ________ exposure.
A) economic B) competitive C) strategic D) all of the above Answer:
Question: What type of international risk exposure measures the change in present value of
a firm resulting from changes in future operating cash flows caused by any unexpected
change in exchange rates? A) transaction exposure B) accounting exposure C) operating
exposure D) translation exposure Answer:
Question: ________ cash flows arise from intracompany and intercompany receivables
and payments, while ________ cash flows are payments for the use of loans and equity. A)
Financing; operating B) Operating; financing C) Operating; accounting D) Accounting;
financing Answer:
Question: Which of the following is NOT an example of a financial cash flow? A) parent
invested equity capital B) interest on intrafirm lending C) payment for goods and services
D) intrafirm principal payments Answer:
Question: Which of the following is NOT an example of an operating cash flow? A)
management fees and distributed overhead B) royalties and license fees C) rent and lease
payments D) dividend paid to parent company Answer:
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Question: ________ exposure is far more important for the long-run health of a business
than changes caused by ________ or ________ exposure. A) Operating; translation;
transaction B) Transaction; operating; translation C) Accounting; translation; transaction
D) Translation; operating; transaction Answer:
Question: Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month
C$100,000 contract to complete sign work in Winnipeg, Manitoba, Canada. The current
spot rate is $1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium,
management would use ________ today when preparing operating budgets. A) $102,000
B) $101,000 C) $100,000 D) none of the above Answer:
Question: When considering the phases of adjustment and response to operating exposure
in the LONG RUN, price changes tend to be ________ and volume changes tend to be
________. A) fixed/contracted; contracted. B) fixed/contracted; completely flexible. C)
completely flexible; completely flexible. D) completely flexible; contracted. Answer:
Question: The goal of operating exposure analysis is to identify strategic operating
techniques the firm might adopt to enhance value in the face of unanticipated exchange
rate changes. Answer:
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Question: Operating cash flows may occur in different currencies and at different times,
but financing cash flows may occur only in a single currency. Answer:
Question: Expected changes in foreign exchange rates should already be factored into
anticipated operating results by management and investors. Answer:
Question: Moral hazard may occur when a firm or individual takes on more risk when it
knows that someone else will "pick up the tab." Answer:
Question: Even though contracts are often fixed in the short run, as time passes, prices and
costs can be changed to reflect the new competitive realities caused by a change in
exchange rates. Answer:
Question: Recently the British Pound suffered an unexpected depreciation in value. Which
of the following actions being considered by Coventry Furniture of London, a purely
domestic furniture manufacturer and retailer, would be considered a highly unlikely
response to the depreciation of the pound? A) Coventry might choose to maintain its
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domestic sales prices constant in pound terms. B) Coventry might try to raise domestic
prices because competing imports are now priced higher in England. C) Coventry might
try to lower domestic prices because competing imports are now priced higher in England.
D) none of the above Answer:
Question: Recently the Canadian dollar realized an unexpected appreciation in value.
Which of the following actions being considered by Tall Timber Exports, a Canadian
logging firm specializing in exporting raw forest products, would be considered a highly
unlikely response to the appreciation of the Canadian dollar? A) Tall Timber Exports might
lower export prices in an effort to maintain market share. B) Tall Timber Exports might
raise export prices only slightly in an effort to increase market share. C) Tall Timber
Exports might leave export prices as they are and wait to determine what actions to take if
any in the future. D) all of the above Answer:
Question: For a firm that competes internationally to sell its products, a depreciation of its
domestic currency relative to markets where the firm exports goods, should eventually
result in ________ sales at home and ________ sales abroad, other things equal. A) fewer;
greater B) fewer; fewer C) greater; greater D) greater; fewer Answer:
Question: Brimmo Motorcycles Inc., a U.S.-based firm, manufactures and sells electric
motorcycles both domestically and internationally. A sudden and unexpected appreciation
of the U.S. dollar should allow sales to ________ at home and ________ abroad. (Assume
other factors remain unchanged.) A) increase; increase B) decrease; decrease C) increase;
decrease D) decrease; increase Answer:
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Question: The strategy management undertakes in response to unexpected changes in
exchange rates depends to a large measure on their opinion about the price elasticity of
demand. Answer:
Question: Unexpected changes in exchange rates is never good news for a firms operating
income. Answer:
Question: Which of the following is NOT an example of diversifying operations? A)
diversifying sales B) diversifying location of operations C) raising funds in more than one
country D) sourcing raw materials in more than one country Answer:
Question: Which of the following is NOT an example of diversification in financing? A)
raising funds in more than one market B) raising funds in more than one country C)
diversifying sales D) All of the above qualify. Answer:
Question: When disequilibria in international markets occur, management can take
advantage by: A) doing nothing if they are already diversified and able to realize beneficial
portfolio effects. B) recognizing disequilibria faster than purely domestic competitors. C)
shifting operational of financing activities to take advantage of the disequilibria. D) all of
the above Answer:
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Question: Purely domestic firms will be at a disadvantage to MNEs in the event of market
disequilibria because: A) domestic firms lack comparative data from its own sources. B)
international firms are already so large. C) all of the domestic firms raw materials are
imported. D) None of the above; domestic firms are not at a disadvantage. Answer:
Question: Which of the following is probably NOT an advantage of foreign exchange risk
management? A) the reduction of the variability of cash flows due to domestic business
cycles B) increased availability of capital C) reduced cost of capital D) All of the above are
potential advantages of foreign exchange risk management. Answer:
Question: Which of the following is NOT an example of a form of political risk that might
be avoided or reduced by foreign exchange risk management? A) expropriation of assets
B) destruction of raw materials through natural disaster C) war D) unfavorable legal
changes Answer:
Question: Management must be able to predict disequilibria in international markets to
take advantage of diversification strategies. Answer:
Question: If a firm diversifies its financing sources, it will be pre-positioned to take
advantage of temporary deviations from the International Fisher Effect. Answer:
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Question: Diversifying the financing base means diversifying sales, location of production
facilities, and raw material sources. Answer:
Question: The variability of a firms operating cash flows is probably reduced by
international diversification of its production, sourcing, and sales because exchange rate
changes under disequilibrium conditions are likely to increase the firms competitiveness in
some markets while reducing it in others. Answer:
Question: Diversification is possibly the best technique for reducing the problems
associated with international transactions. Provide one example each of international
financial diversification and international operational diversification and explain how the
action reduces risk. Answer:
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Question: Which of the following is NOT identified by your authors as a proactive
management technique to reduce exposure to foreign exchange risk? A) matching currency
cash flows B) cross-currency swaps C) remaining a purely domestic firm D) parallel loans
Answer:
Question: Which one of the following management techniques is likely to best offset the
risk of long-run exposure to receivables denominated in a particular foreign currency? A)
Borrow money in the foreign currency in question. B) Lend money in the foreign currency
in question. C) Increase sales to that country. D) Increase sales in this country. Answer:
Question: Which one of the following management techniques is likely to best offset the
risk of long-run exposure to payables denominated in a particular foreign currency? A)
Borrow money in the foreign currency in question. B) Lend money in the foreign currency
in question. C) Rely on the Federal Reserve Board to enact monetary policy favorable to
your exposure risk. D) none of the above Answer:
Question: The particular strategy of trying to offset stable inflows of cash from one
country with outflows of cash in the same currency is known as: A) hedging. B)
diversification. C) matching. D) balancing. Answer:
Question: Which of the following is NOT an acceptable hedging technique to reduce risk
caused by a relatively predictable long-term foreign currency inflow of Japanese yen? A)
Import raw materials from Japan denominated in yen to substitute for domestic suppliers.
B) Pay suppliers from other countries in yen. C) Import raw materials from Japan
denominated in dollars. D) Acquire debt denominated in yen. Answer:
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Question: An MNE has a contract for a relatively predictable long-term inflow of Japanese
yen that the firm chooses to hedge by seeking out potential suppliers in Japan. This
hedging strategy is referred to as: A) a natural hedge. B) currency-switching. C) matching.
D) diversification. Answer:
Question: An MNE has a contract for a relatively predictable long-term inflow of Japanese
yen that the firm chooses to hedge by paying for imports from Canada in Japanese yen.
This hedging strategy is known as: A) a natural hedge. B) currency-switching. C)
matching. D) diversification. Answer:
Question: A U.S. timber products firm has a long-term contract to import unprocessed logs
from Canada. To avoid occasional and unpredictable changes in the exchange rate between
the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the
impact of any exchange rate movement. This type of agreement is referred to as: A)
risk-sharing. B) currency-switching. C) matching. D) a natural hedge. Answer:
Question: A ________ occurs when two business firms in separate countries arrange to
borrow each others currency for a specified period of time. A) natural hedge loan B)
forward loan C) currency switch loan D) back-to-back loan Answer:
Question: A Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian
subsidiary agree to a parallel loan agreement. In such an agreement, the Canadian firm is
making a/an ________ loan to the ________ subsidiary while effectively financing the
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________ subsidiary. A) indirect; U.S.; Canadian B) indirect; Canadian; U.S. C) direct;
U.S.; Canadian D) direct; Canadian; U.S. Answer:
Question: Which of the following is NOT an important impediment to widespread use of
parallel loans? A) difficulty in finding an appropriate counterparty B) the risk that one of
the parties will fail to return the borrowed funds when agreed C) the process does not
avoid exchange rate risk D) All of the above are significant impediments. Answer:
Question: A ________ resembles a back-to-back loan except that it does not appear on a
firms balance sheet. A) forward loan B) currency hedge C) counterparty D) currency swap
Answer:
Question: A ________ is the term used to describe a foreign currency agreement between
two parties to exchange a given amount of one currency for another, and after a period of
time, to give back the original amounts. A) matched flow B) currency swap C)
back-to-back loan D) none of the above Answer:
Question: A British firm and a U.S. Corporation each wish to enter into a currency swap
hedging agreement. The British firm is receiving U.S. dollars from sales in the U.S. but
wants pounds. The U.S. firm is receiving pounds from sales in Britain but wants dollars.
Which of the following choices would best satisfy the desires of the firms? A) The British
firm pays dollars to a swap dealer and receives pounds from the dealer. The U.S. firm pays
pounds to the swap dealer and receives dollars. B) The U.S. firm pays dollars to a swap
dealer and receives pounds from the dealer. The British firm pays pounds to the swap
dealer and receives dollars. C) The British firm pays pounds to a swap dealer and receives
pounds from the dealer. The U.S. firm pays dollars to the swap dealer and receives dollars.
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D) The British firm pays dollars to a swap dealer and receives dollars from the dealer. The
U.S. firm pays pounds to the swap dealer and receives pounds. Answer:
Question: Reinvoicing centers provide the following benefit(s): A) aid in the management
of foreign exchange exposure. B) effectively guarantee the exchange rate for future orders.
C) help manage intra-subsidiary cash flows. D) all of the above Answer:
Question: NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment
from the Allofit Territories Company (ATC) located in Canada. With the steady decline of
the U.S dollar against the Canadian dollar NRI is finding a continued relationship with
ATC to be an increasingly difficult proposition. In response to NRIs request, ATC has
proposed the following risk-sharing arrangement. First, set the current spot rate as the base
rate. As long as spot rates stay within 5% (up or down) NRI will pay at the base rate. Any
rate outside of the 5% range, ATC will share equally with NRI the difference between the
spot rate and the base rate. If the current spot rate is C$1.20/$, what are the upper and
lower limits for trading to take place at C$1.20? A) C$1.205/$ - C$1.195/$ B) C$1.15/$ -
C$1.25/$ C) C$1.14/$ - C$1.26/$ D) none of the above Answer:
Question: NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment
from The Allofit Territories Company (ATC) located in Canada. With the steady decline of
the U.S dollar against the Canadian dollar NRI is finding a continued relationship with
ATC to be an increasingly difficult proposition. In response to NRIs request, ATC has
proposed the following risk-sharing arrangement. First, set the current spot rate as the base
rate. As long as spot rates stay within 5% (up or down) NRI will pay at the base rate. Any
rate outside of the 5% range, ATC will share equally with NRI the difference between the
spot rate and the base rate. If NRI has a payable of C$100,000 due today and the current
spot rate is C$1.17/$, how much does LBC owe in U.S. dollars? A) $83,333 B) $85,470 C)
$85,837 D) $117,000 Answer:
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Question: Costs associated with the purchase of sizeable put options positions include each
of the following EXCEPT: A) the purchase price of the options. B) the opportunity cost of
buying the options rather than diversifying operations to reduce risk. C) executive salaries
of having corporate offices in more than one country. D) none of the above Answer:
Question: Currency swaps are exclusively for periods of time under one year. Answer:
Question: Most swap dealers arrange swaps so that each firm that is a party to the
transaction does not know who the counterparty is. Answer:
Question: Most swap dealers arrange swaps so that each firm that is a party to the
transaction knows who the counterparty is. Answer:
Question: Swap agreements are treated as off-balance sheet transactions via U.S.
accounting methods. Answer:
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Question: Swap agreements are treated as line items on the balance sheet via U.S.
accounting methods. Answer:
Question: After being introduced in the 1980s, currency swaps have remained a relatively
insignificant financial derivative instrument. Answer:
Question: After being introduced in the 1980s, currency swaps have gained increasing
importance as financial derivative instruments. Answer:
Question: The empirical evidence strongly supports the proposition that contractual hedges
can effectively eliminate operating exposure. Answer:
Question: A British firm has a subsidiary in the U.S., and a U.S. firm, known to the British
firm, has a subsidiary in Britain. Define and then provide an example for each of the
following management techniques for reducing the firms operating cash flows. The
following are techniques to consider: a) matching currency cash flows b) risk-sharing
agreements c) back-to-back or parallel loans Answer:
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