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2) 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.
3) 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
4) 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.
5) 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.
6) 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.
7) 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.
8) 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.
9) A ________ occurs when two business firms in separate countries arrange to borrow each
other's currency for a specified period of time.
A) natural hedge loan
B) forward loan
C) currency switch loan
D) back-to-back loan
10) 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 ________ subsidiary.
A) indirect; U.S.; Canadian
B) indirect; Canadian; U.S.
C) direct; U.S.; Canadian
D) direct; Canadian; U.S.
11) 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.
12) A ________ resembles a back-to-back loan except that it does not appear on a firm's balance
sheet.
A) forward loan
B) currency hedge
C) counterparty
D) currency swap
13) 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
14) 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.
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.
15) 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 NRI's 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
16) 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 NRI's request, ATC has proposed the following
risk-sharing arrangement. First, set the current spot rate of C$1.20/$ 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 had a payable of C$100,000 due today and the current spot rate were C$1.17/$, how
much does would NRI owe in U.S. dollars?
A) $83,333
B) $85,470
C) $85,837
D) $117,000
17) 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
18) Currency swaps are exclusively for periods of time under one year.
19) Most swap dealers arrange swaps so that each firm that is a party to the transaction does not
know who the counterparty is.
20) Most swap dealers arrange swaps so that each firm that is a party to the transaction knows
who the counterparty is.
21) Swap agreements are treated as off-balance sheet transactions via U.S. accounting methods.
22) Swap agreements are treated as line items on the balance sheet via U.S. accounting methods.
23) After being introduced in the 1980s, currency swaps have remained a relatively insignificant
financial derivative instrument.
24) After being introduced in the 1980s, currency swaps have gained increasing importance as
financial derivative instruments.
25) The empirical evidence strongly supports the proposition that contractual hedges can
effectively eliminate operating exposure.
17
26) 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 firm's 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: a) Matching currency cash flows requires that the British firm with dollar receivables
must establish an equivalent dollar payable. They could do this by borrowing dollars and
repaying the loan with the proceeds from the receivables account. Or they could move all or part
