International Financial Management, 8e (Eun)
1) Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in
exchange rate
A) can have significant economic consequences for U.S. firms.
B) can have significant economic consequences for Japanese firms.
C) can have significant economic consequences for both U.S. and Japanese firms.
D) none of the options
2) Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in
exchange rate
A) will tend to weaken the competitive position of import-competing U.S. car makers.
B) will tend to strengthen the competitive position of import-competing U.S. car makers.
C) will tend to strengthen the competitive position of Japanese car makers at the expense of U.S.
makers.
D) none of the options
3) The link between a firm’s future operating cash flows and exchange rate fluctuations is
A) asset exposure.
B) operating exposure.
C) asset exposure and operating exposure.
D) none of the options
4) When the Mexican peso collapsed in 1994, declining by 37 percent,
A) U.S. firms that exported to Mexico and priced in peso were adversely affected.
B) U.S. firms that exported to Mexico and priced in dollars were adversely affected.
C) U.S. firms were unaffected by the peso collapse, since Mexico is such a small market.
D) U.S. firms that exported to Mexico and priced in peso were adversely affected, and U.S. firms
that exported to Mexico and priced in dollars were adversely affected.
5) When exchange rates change,
A) U.S. firms that produce domestically and sell only to domestic customers will be unaffected.
B) U.S. firms that produce domestically and sell only to domestic customers can be affected if they
compete against imports.
C) U.S. firms that produce domestically and sell only to domestic customers will be affected, but
only if they borrow in foreign currency to finance their domestic operations.
D) U.S. firms that produce domestically and sell only to domestic customers will be unaffected,
and U.S. firms that produce domestically and sell only to domestic customers can be affected if
they compete against imports.
6) When exchange rates change,
A) this can alter the operating cash flow of a domestic firm.
B) this can alter the competitive position of a domestic firm.
C) this can alter the home currency values of a multinational firm’s assets and liabilities.
D) all of the options
7) Two studies found a link between exchange rates and the stock prices of U.S. firms;
A) this suggests that exchange rate changes can systematically affect the value of the firm by
influencing its operating cash flows.
B) this suggests that exchange rate changes can systematically affect the value of the firm by
influencing the domestic currency values of its assets and liabilities.
C) this suggests that exchange rate changes can systematically affect the value of the firm by
influencing its operating cash flows, as well influencing the domestic currency values of its assets
and liabilities.
D) none of the options
8) It is conventional to classify foreign currency exposures into the following types:
A) economic exposure, transaction exposure, and translation exposure.
B) economic exposure, noneconomic exposure, and political exposure.
C) national exposure, international exposure, and trade exposure.
D) conversion exposure, and exchange exposure.
9) Exposure to currency risk can be measured by the sensitivities of
A) the future home currency values of the firm’s assets and liabilities.
B) the firm’s operating cash flows to random changes in exchange rates.
C) the future home currency values of the firm’s assets and liabilities, as well as the firm’s
operating cash flows to random changes in exchange rates.
D) none of the options
10) 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 effect of changes in exchange rates will have on the consolidated financial reports of a
MNC.
D) the effect of unanticipated changes in exchange rates on the dollar value of contractual
obligations denominated in a foreign currency.
11) Economic exposure refers to
A) the sensitivity of realized domestic currency values of the firm’s contractual cash flows
denominated in foreign currencies to unexpected exchange rate changes.
B) the extent to which the value of the firm would be affected by unanticipated changes in
exchange rate.
C) the potential that the firm’s consolidated financial statement can be affected by changes in
exchange rates.
D) ex post and ex ante currency exposures.
12) Currency risk
A) is the same as currency exposure.
B) represents random changes in exchange rates.
C) measure “what the firm has at risk.”
D) is the same as currency exposure and represents random changes in exchange rates.
13) Suppose a U.S.-based MNC maintains a vacation home for employees in the British
countryside and the local price of this property is always moving together with the pound price of
the U.S. dollar. As a result,
A) whenever the pound depreciates against the dollar, the local currency price of this property goes
up by the same proportion.
B) the firm is not exposed to currency risk even if the pound–dollar exchange rate fluctuates
randomly.
C) whenever the pound depreciates against the dollar, the local currency price of this property goes
up by the same proportion. Additionally, the firm is not exposed to currency risk even if the
pound–dollar exchange rate fluctuates randomly.
D) none of the options
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Copyright © 2018 McGraw-Hill
15) The exposure coefficient b = in the regression P = a + b × S + e is
A) a measure of how a change in the exchange rate affects the dollar value of a firm’s assets.
B) a value of zero if the value of the firm’s assets is perfectly correlated with changes in the
exchange rate.
C) a measure of how a change in the exchange rate affects the dollar value of a firm’s assets, and
has a value of zero if the value of the firm’s assets is perfectly correlated with changes in the
exchange rate.
D) none of the options
Answer: A
Topic: How to Measure Economic Exposure
16) The exposure coefficient b = in the regression P = a + b × S + e informs
A) how much of a foreign currency to sell forward.
B) the part of the variability of the dollar value of the asset that is related to random changes in the
exchange rate.
C) captures the residual part of the dollar value variability that is independent of exchange rate
movements.
D) how many call options to write.
Answer: A
Topic: How to Measure Economic Exposure
17) Before you can use the hedging strategies such as a forward market hedge, options market
hedge, and so on, you should consider running a regression of the form P = a + b × S + e . When
reviewing the output, you should initially focus on
A) the intercept a.
B) the slope coefficient b.
C) mean square error, MSE.
D) R2.
18) The link between the home currency value of a firm’s assets and liabilities and exchange rate
fluctuations is
A) asset exposure.
B) operating exposure.
C) asset exposure and operating exposure.
D) none of the options
19) 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) faces no exchange rate risk and should never hedge since this could actually increase its
currency exposure.
20) In recent years, the U.S. dollar has depreciated substantially against most major currencies of
the world, especially against the euro.
A) The stronger euro has made many European products more expensive in dollar terms, hurting
sales of these products in the United States.
B) The stronger euro has made many American products less expensive in euro terms, boosting
sales of U.S. products in Europe.
C) The stronger euro has made many European products more expensive in dollar terms, hurting
sales of these products in the United States. Additionally, the stronger euro has made many
American products less expensive in euro terms, boosting sales of U.S. products in Europe.
D) none of the options
21) In recent years,
A) the U.S. dollar has appreciated substantially against most major currencies of the world,
especially against the euro.
B) the U.S. dollar has depreciated substantially against most major currencies of the world,
especially against the euro.
C) the U.S. dollar has maintained its value against most major currencies of the world, especially
against the euro.
D) none of the options
22) From the perspective of the U.S. firm that owns an asset in Britain, the exposure that can be
measured by the coefficient b in regressing the dollar value P of the British asset on the dollar–
pound exchange rate S using regression equation P = a + b × S + e is
A) asset exposure.
B) operating exposure.
C) accounting exposure.
D) none of the options
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Copyright © 2018 McGraw-Hill
24) On the basis of regression equation P = a + b × S + e, we can decompose the variability of the
dollar value of the asset, VAR(P), into two separate components: VAR(P) = b2 × VAR(S) +
VAR(e). The first term in the right-hand side of the equation, b2 × VAR(S) represents
A) the part of the variability of the dollar value of the asset that is related to random changes in the
exchange rate.
B) the residual part of the dollar value variability that is independent of exchange rate movements.
C) the part of the variability of the dollar value of the asset that is related to random changes in the
exchange rate, as well as the residual part of the dollar value variability that is independent of
exchange rate movements.
D) none of the options
Answer: A
Topic: How to Measure Economic Exposure
25) On the basis of regression equation P = a + b × S + e, we can decompose the variability of the
dollar value of the asset, VAR(P), into two separate components: VAR(P) = b2 × VAR(S) +
VAR(e). The second term in the right-hand side of the equation, VAR(e) represents
A) the part of the variability of the dollar value of the asset that is related to random changes in the
exchange rate.
B) the residual part of the dollar value variability that is independent of exchange rate movements.
C) the part of the variability of the dollar value of the asset that is related to random changes in the
exchange rate, as well as the residual part of the dollar value variability that is independent of
exchange rate movements.
D) none of the options
Answer: B
Topic: How to Measure Economic Exposure
26) What does it mean to have redenominated an asset in terms of the dollar?
A) You have undertaken a hedging strategy that gives the asset a constant dollar value.
B) Multiply the foreign currency value of the asset by the spot exchange rate.
C) You have undertaken accounting changes to eliminate translation exposure.
D) none of the options
27) 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.
28) Operating exposure can be defined as
A) the link between the future home currency values of the firm’s assets and liabilities and
exchange rate fluctuations.
B) the extent to which the firm’s operating cash flows would be affected by random changes in
exchange rates.
C) the sensitivity of realized domestic currency values of the firm’s contractual cash flows
denominated in foreign currencies to unexpected exchange rate changes.
D) the potential that the firm’s consolidated financial statement can be affected by changes in
exchange rates.
29) The extent to which the firm’s operating cash flows would be affected by random changes in
exchange rates is called
A) asset exposure.
B) operating exposure.
C) asset exposure or operating exposure.
D) none of the options
30) The variability of the dollar value of an asset (invested overseas) depends on
A) the variability of the dollar value of the asset that is related to random changes in the exchange
rate.
B) the dollar value variability that is independent of exchange rate movements.
C) the variability of the dollar value of the asset that is related to random changes in the exchange
rate, as well as the dollar value variability that is independent of exchange rate movements.
D) none of the options
31) Consider a U.S. MNC who owns a foreign asset. If the foreign currency value of the asset is
inversely related to changes in the dollar–foreign currency exchange rate,
A) the company has a built-in hedge.
B) the dollar value variability that is independent of exchange rate movements.
C) the company has a built-in hedge and the dollar value variability that is independent of
exchange rate movements.
D) none of the options
32) 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 options
33) Which of the following are identified by your text as a strategy for managing operating
exposure?
(i) Selecting low-cost production sites
(ii) Flexible sourcing policy
(iii) Diversification of the market
(iv) Product differentiation and R&D efforts
(v) Financial Hedging
A) (i), (iii), and (v) only
B) (ii) and (iv) only
C) (i), (iv), and (v) only
D) all of the options
34) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
$
2.00
$
1.80
/£
P*
£
2,000
£
2,500
£
3,000
P
$
4,400
$
5,000
$
5,400
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
The expected value of the investment in U.S. dollars is
A) $4,950.
B) $3,700.
C) $2,112.50.
D) none of the options
35) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
$
2.00
$
1.80
/£
P*
£
2,000
£
2,500
£
3,000
P
$
4,400
$
5,000
$
5,400
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
The variance of the exchange rate is:
A) 0.0200
B) 0.10
C) 0.002
D) none of the options
36) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
$
2.00
$
1.80
/£
P*
£
2,000
£
2,500
£
3,000
P
$
4,400
$
5,000
$
5,400
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
The “exposure” (i.e. the regression coefficient beta) is
Hint: Calculate the expression .
A) −25,000
B) 2,500
C) −2,500
D) none of the options
37) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
$
2.00
$
1.80
/£
P*
£
2,000
£
2,500
£
3,000
P
$
4,400
$
5,000
$
5,400
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
Which of the following conclusions are correct?
A) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 236,717 ($)2 and 493,751 ($)2 respectively.
B) Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 236,717 ($)2 and 493,751 ($)2 respectively.
C) Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 125,000 ($)2 and −127,500 ($)2 respectively.
D) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 125,000 ($)2 and −127,500 ($)2 respectively.
38) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
$
2.00
$
1.80
/£
P*
£
2,000
£
2,500
£
3,000
P
$
4,400
$
5,000
$
5,400
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
Which of the following would be an effective hedge?
A) Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
B) Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
C) Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
D) none of the options
39) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
/£
$
2.00
/£
$
1.80
/£
P*
£
3,000
£
2,500
£
2,000
P
$
6,600
$
5,000
$
3,600
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
The expected value of the investment in U.S. dollars is
A) $5,050
B) $3,700
C) $2,112.50
D) none of the options
40) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
/£
$
2.00
/£
$
1.80
/£
P*
£
3,000
£
2,500
£
2,000
P
$
6,600
$
5,000
$
3,600
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
The variance of the exchange rate is
A) 0.0200
B) 0.10
C) 0.002
D) none of the options
41) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
/£
$
2.00
/£
$
1.80
/£
P*
£
3,000
£
2,500
£
2,000
P
$
6,600
$
5,000
$
3,600
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
The “exposure” (i.e. the regression coefficient beta) is
Hint: Calculate the expression .
A) 7,500
B) 2,500
C) −2,500
D) none of the options
42) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
/£
$
2.00
/£
$
1.80
/£
P*
£
3,000
£
2,500
£
2,000
P
$
6,600
$
5,000
$
3,600
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
Which of the following conclusions are correct?
A) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 1,125,000 ($)2 and 2,500 ($)2 respectively.
B) Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 236,717 ($)2 and 493,751 ($)2 respectively.
C) Most of the volatility of the dollar value of the British asset cannot be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 125,000 ($)2 and −127,500 ($)2 respectively.
D) Most of the volatility of the dollar value of the British asset can be removed by hedging
exchange risk because b2[Var(S)] and VAR(e) are 125,000 ($)2 and −127,500 ($)2 respectively.
43) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.20
/£
$
2.00
/£
$
1.80
/£
P*
£
3,000
£
2,500
£
2,000
P
$
6,600
$
5,000
$
3,600
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
Which of the following would be an effective hedge?
A) Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
B) Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
C) Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
D) none of the options
44) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.50
/£
$
2.00
1.60
/£
P*
£
1,800
£
2,250
2,812.50
P
$
4,500
$
4,500
4,500
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
The expected value of the investment in U.S. dollars is:
A) $5,050
B) $4,500
C) $2,112.50
D) none of the options
45) A U.S. firm holds an asset in Great Britain and faces the following scenario:
State 1
State 2
State 3
Probability
25%
50%
25%
Spot rate
$
2.50
/£
$
2.00
1.60
/£
P*
£
1,800
£
2,250
2,812.50
P
$
4,500
$
4,500
4,500
where,
P* = Pound sterling price of the asset held by the U.S. firm
P = Dollar price of the same asset
The variance of the exchange rate is
A) 0.0200
B) 0.1019
C) 0.0020
D) none of the options