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62) Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation
of the dollar against the euro, which of the following conclusions are correct?
A) The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace.
B) A given operating cash flow in euro will be converted to a higher U.S. dollar cash flow.
C) The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace, and a given operating cash flow in euro will be converted to a higher U.S. dollar cash
flow.
D) none of the options
63) Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation
of the dollar against the euro, which of the following describes the competitive effect of the
depreciation?
A) The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace.
B) A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.
C) The cash flow in euro could be altered due an alteration in the firm's competitive position in the
marketplace, and a given operating cash flow in euro will be translated to a higher U.S. dollar cash
flow.
D) none of the options
64) Consider a U.S. MNC with operations in Great Britain. Which of the following are potential
risks following a strengthening of the dollar?
A) A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's
competitive position in the marketplace.
B) A given operating cash flow in pounds will be converted into a lower dollar amount after the
pound depreciation.
C) A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's
competitive position in the marketplace, and a given operating cash flow in pounds will be
converted into a lower dollar amount after the pound depreciation.
D) none of the options
65) Which of the following is false?
A) The competitive effect is that a depreciation may affect operating cash flow in the foreign
currency by altering the firm's competitive position in the marketplace.
B) The conversion effect is defined as a given operating cash flow in a foreign currency will be
converted into a lower dollar amount after a currency depreciation.
C) The competitive effect is defined as a given operating cash flow in a foreign currency will be
converted into a lower dollar amount after a currency depreciation.
D) none of the options
66) Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a
depreciation of the dollar against the euro, which of the following describes the conversion effect
of the depreciation?
A) The cash flow in euro could be altered due a change in the firm's competitive position in the
marketplace.
B) A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.
C) The cash flow in euro could be altered due a change in the firm's competitive position in the
market place, and a given operating cash flow in euro will be translated to a higher U.S. dollar cash
flow.
D) none of the options
67) Consider a U.S.-based MNC with a wholly-owned French subsidiary. Following a
depreciation of the dollar against the euro, which of the following best describes the mechanism of
any effect of the depreciation?
A) The change in the cash flow in euro due an alteration in the firm's competitive position in the
marketplace is in part a function of the elasticity of demand for the firm's product.
B) A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow
regardless of the firm's hedging program.
C) The change in the cash flow in euro due an alteration in the firm's competitive position in the
marketplace is in part a function of the elasticity of demand for the firm's product, and a given
operating cash flow in euro will be translated to a higher U.S. dollar cash flow regardless of the
firm's hedging program.
D) none of the options
68) Which of the following is true?
A) The competitive effect is that a currency depreciation may affect operating cash flow in the
foreign currency by altering the firm's competitive position in the marketplace.
B) The conversion effect is defined as a given accounting cash value in a foreign currency will be
converted into a lower dollar amount after currency depreciation.
C) The competitive effect is defined as a given operating cash flow in a foreign currency will be
converted into a lower dollar amount after a currency depreciation.
D) none of the options
69) Consider a U.S.-based MNC with a wholly-owned European subsidiary selling a product
sourced in euro and priced in euro with inelastic demand. Following a depreciation of the dollar
against the euro, which of the following is the truest?
A) Since they have inelastic demand, the U.S. firm can just pass through the impact of the
exchange rate change.
B) Since they have elastic demand, the U.S. firm cannot just pass through the impact of the
exchange rate change.
C) Since the exchange rate movement was favorable to the U.S. firm, there is no impact on the
firm's position.
D) none of the options.
70) A firm's operating exposure is
A) defined as the extent to which the firm's operating cash flows would be affected by the random
changes in exchange rates.
B) determined by the structure of the markets in which the firm sources its inputs, such as labor
and materials, and sells its products.
C) determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its
markets, product mix, and sourcing.
D) all of the options
71) Generally speaking, a firm is subject to high degrees of operating exposure
A) when its costs are sensitive to exchange rate changes.
B) when its prices are sensitive to exchange rate changes.
C) when either its cost or its price is sensitive to exchange rate changes.
D) none of the options
72) Generally speaking, when both a firm's costs and its price are sensitive to exchange rate
changes,
A) the firm is not subject to high degrees of operating exposure.
B) the firm is subject to high degrees of operating exposure.
C) the firm should hedge.
D) none of the options
73) The firm may not be subject to high degrees of operating exposure
A) when changes in real exchange rates are exactly offset by the inflation differential.
B) when changes in nominal exchange rates are exactly matched by the inflation differential.
C) when changes in nominal exchange rates are exactly offset by the inflation differential.
D) none of the options
74) The firm may not be able to pass through changes in the exchange rate
A) in markets with low product differentiation.
B) in markets with high price elasticities.
C) in markets with low product differentiation or in markets with high price elasticities.
D) none of the options
75) The firm may not be able to pass through changes in the exchange rate
A) in markets with mainly domestic (foreign to the firm) competitors.
B) in markets with low price elasticities.
C) in markets with mainly domestic (foreign to the firm) competitors or in markets with low price
elasticities.
D) none of the options
76) Generally speaking, a firm is subject to high degrees of operating exposure when
A) either its cost or its price is sensitive to exchange rate changes.
B) both the cost and the price are sensitive to exchange rate changes.
C) both the cost and the price are insensitive to exchange rate changes.
D) none of the options
77) What is the objective of managing operating exposure?
A) Stabilize cash flows in the face of fluctuating exchange rates.
B) Selecting low cost production sites.
C) Increase the variability of cash flows in the face of fluctuating exchange rates.
D) Stabilize cash flows in the face of fluctuating exchange rates, and increase the variability of
cash flows in the face of fluctuating exchange rates.
78) What is the objective of managing operating exposure?
A) Stabilize accounting results in the face of fluctuating exchange rates.
B) Selecting low cost production sites.
C) Increase the variability of cash flows in the face of fluctuating exchange rates.
D) none of the options
79) Managing operating exposure
A) is a short-term tactical issue.
B) is a long-term issue, like selecting a site for a factory.
C) is relatively unimportant, since most MNCs have a built-in hedge.
D) none of the options
80) Which of the following can a company use to manage operating exposure?
A) Selecting low-cost production sites, diversifying the market.
B) Low cost production sites, but not financial hedging.
C) Pursuing a flexible sourcing policy, product differentiation, R&D efforts.
D) Selecting low-cost production sites, diversifying the market, as well as pursuing a flexible
sourcing policy, product differentiation, R&D efforts.
81) When the domestic currency is strong or expected to become strong,
A) this could erode the competitive position of the firm's exports.
B) this could erode the competitive position of the firm's import competition.
C) the firm should consider locating production facilities in a foreign country where costs are low.
D) this could erode the competitive position of the firm's exports and the firm should consider
locating production facilities in a foreign country where costs are low.
82) A foreign country could provide low cost production sites
A) because the factors of production are underpriced.
B) because the currency is undervalued.
C) because the locals like to give away their land labor and capital to foreigners.
D) because the factors of production are underpriced and because the currency is undervalued.
83) While maintaining multiple production sites does provide a firm valuable options,
A) a firm may miss out on economies of scope.
B) a firm may miss out on economies of scale.
C) a firm may find that exchange rate changes can fully offset the advantage of multiple
manufacturing sites.
D) a firm may miss out on economies of scope and economies of scale.
84) Goldman Sachs estimates that as much as ________ percent of the pretax profits that Porsche
reported for a recent fiscal year came from skillfully executing currency options.
A) 5
B) 10
C) 15
D) 75
85) Developing multiple production sites in a variety of countries,
A) can create an excess capacity problem.
B) can lead to underutilization of domestic plants.
C) can lead to domestic job losses.
D) all of the options
86) A flexible sourcing policy
A) is primarily concerned with low-cost (and often low-quality) vendors.
B) need not be confined just to materials and parts.
C) only works for manufacturing firms, not service firms.
D) puts the focus on the exchange rate at the expense of shipping rates.
87) A firm that is committed to keeping manufacturing facilities in only the home country (and not
developing multiple production sites in a variety of countries) can
A) not mitigate the effects of exchange rate changes.
B) lessen the effect of exchange rate changes by sourcing from where input costs are low.
C) focus on selling commodity products with product differentiation.
D) pursue a strategy of increasing its products price elasticity of demand.
88) 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.
89) Which of the following is a true statement?
A) As long as exchange rates do not always move in the same direction, the firm can stabilize its
operating cash flows by diversifying its export market.
B) The firm should not get into new lines of business solely to diversify exchange risk because
conglomerate expansion can bring about inefficiency and losses.
C) all of the options above
D) none of the options
90) A firm that is committed to keeping manufacturing facilities in only the home country (and not
developing multiple production sites in a variety of countries) can
A) lessen the effect of exchange rate changes by pursuing a strategy of diversifying the markets in
which the firm's products are sold.
B) not mitigate the effects of exchange rate changes.
C) lessen the effect of exchange rate changes by pursuing a strategy of selling commodity products
without product differentiation.
D) pursue a strategy of increasing its products price elasticity of demand.
91) It can be argued that, while financial hedging can be used to stabilize a firm's cash flows,
A) it is not a substitute for long-term operational hedging.
B) it is therefore a substitute for long-term operational hedging.
C) it is inferior to money market hedging.
D) none of the options.
92) Investments in R&D
A) are usually a waste of time and money.
B) can allow the firm to maintain and strengthen its competitive position.
C) can allow the firm to cut costs and enhance productivity.
D) can allow the firm to maintain and strengthen its competitive position, as well as cut costs and
enhance productivity.
93) The price elasticity of demand for unique products tends to be
A) highly elastic.
B) highly inelastic.
C) highly elastic and highly inelastic.
D) none of the options
94) The price elasticity of demand for commodity products tends to be
A) highly elastic.
B) highly inelastic.
C) highly elastic and highly inelastic.
D) none of the options
95) In the figure below, label curves A and B are, respectively,
A) unhedged and hedged.
B) hedged and unhedged.
C) normal and abnormal.
D) none of the options
96) Investment in R&D activities can allow the firm to maintain and strengthen its competitive
position in the face of adverse exchange rate movements. The mechanism for this includes
A) successful R&D efforts allowing the firm to cut costs and enhance productivity.
B) R&D efforts leading to the introduction of new and unique products for which competitors offer
no close substitutes—since the demand for unique products tends to be highly inelastic the firm
would be less exposed to exchange risk.
C) successful R&D efforts creating a perception among consumers that its product is indeed
different from those offered by competitors. Once the firm's product acquires a unique identity, its
demand is less likely to be price-sensitive.
D) all of the options
97) If the stock market of a foreign country is consistently up when the dollar value of the currency
is down,
A) there may not be a great deal of exchange rate risk for a U.S.-based investor.
B) there will be a great deal of exchange rate risk for a U.S.-based investor.
C) then investors can ignore diversification.
D) none of the options
98) Suppose that you hold a piece of land in the city of London that you may want to sell in one
year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the
British economy booms in the future, the land will be worth £2,000, and one British pound will be
worth $1.80. If the British economy slows down, on the other hand, the land will be worth less,
say, £1,500, but the pound will be stronger, say, $2.20/£. You feel that the British economy will
experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.
Estimate your exposure (b) to the exchange risk.
99) Suppose that you hold a piece of land in the city of London that you may want to sell in one
year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the
British economy booms in the future, the land will be worth £2,000, and one British pound will be
worth $1.80. If the British economy slows down, on the other hand, the land will be worth less,
say, £1,500, but the pound will be stronger, say, $2.20/£. You feel that the British economy will
experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.
Compute the variance of the dollar value of your property that is attributable to exchange rate
uncertainty.
100) Suppose that you hold a piece of land in the city of London that you may want to sell in one
year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the
British economy booms in the future, the land will be worth £2,000, and one British pound will be
worth $1.80. If the British economy slows down, on the other hand, the land will be worth less,
say, £1,500, but the pound will be stronger, say, $2.20/£. You feel that the British economy will
experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.
Discuss how you can hedge your exchange risk exposure and also examine the consequences of
hedging.
