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Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
41. The Canadian dollar’s volatility has changed over time but is normally less than the volatility of other currencies.
a.
True
b.
False
42. U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their
profit margins.
a.
True
b.
False
43. If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified.
a.
True
b.
False
44. An MNC can avoid translation exposure if its foreign subsidiaries do not remit their earnings to the parent.
a.
True
b.
False
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
45. Assume a regression model in which the dependent variable is the firm's stock price percentage change, and the
independent variable is the percentage change in the foreign currency. The coefficient is negative. This implies that the
company's stock price increases if the foreign currency appreciates.
a.
True
b.
False
46. A company may become more exposed or sensitive to an individual currency's movements over time for several
reasons, including a reduction in hedging, a greater involvement in the foreign country, or an increased use of the foreign
currency.
a.
True
b.
False
47. Regression analysis cannot be used to assess the sensitivity of a company's performance to economic conditions
because economic conditions are unpredictable.
a.
True
b.
False
48. A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow
currency and the other is an outflow currency.
a.
True
b.
False
49. Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.
a.
True
b.
False
50. The exposure of an MNC's consolidated financial statements to exchange rate fluctuations is known as transaction
exposure.
a.
True
b.
False
51. In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign
subsidiaries.
a.
True
b.
False
52. A reduction in hedging will probably reduce transaction exposure.
a.
True
b.
False
53. The VaR method presumes that the distribution of exchange rate movements is normal.
a.
True
b.
False
54. The VaR method assumes that the volatility (standard deviation) of exchange rate movements changes over time.
a.
True
b.
False
55. Assume that exchange rate movements were unusually stable in a recent period (but will not continue to be so stable
in the future) that was used to derive the estimated maximum expected loss based on the VaR method. The estimated
expected loss derived using VaR based on that recent period will likely overestimate the actual maximum expected loss in
the future.
a.
True
b.
False
56. Some MNCs are subject to economic exposure without being subject to transaction exposure.
a.
True
b.
False
57. If positions in a specific currency among an MNC's subsidiaries offset each other, the decision by one subsidiary to
hedge its position in that currency would increase the MNC's overall exposure.
a.
True
b.
False
58. Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is
subject to:
a.
economic exposure.
b.
transaction exposure.
c.
translation exposure.
d.
economic and transaction exposure.
59. Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it pays is not expected to change for
the next several years. If the Japanese yen appreciates, Jenco’s imports from Japan will probably ____ and if the Japanese
yen depreciates, its imports from Japan will probably ____.
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
a.
increase; decrease
b.
decrease; increase
c.
increase; stay the same
d.
stay the same; stay the same
60. 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:
a.
benefit, because the dollar value of its pound position exceeds the dollar value of its yen position.
b.
benefit, because the dollar value of its yen position exceeds the dollar value of its pound position.
c.
be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen
position.
d.
be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound
position.
61. Generally, MNCs with less foreign revenues than foreign costs will be ____ affected by a ____ foreign currency.
a.
favorably; stronger
b.
favorably; weaker
c.
not; stronger
d.
not; weaker
62. If a U.S. firm's cost of goods sold in Switzerland is much greater than its sales in Switzerland, the appreciation of the
Swiss franc has a ____ impact on the firm's ____.
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
a.
positive; interest expenses
b.
positive; gross profit
c.
negative; gross profit
d.
negative; interest expenses
63. If a U.S. firm's sales in Australia are much greater than its cost of goods sold in Australia, the appreciation of the
Australian dollar has a ____ impact on the firm's ____.
a.
positive; interest expenses
b.
positive; gross profit
c.
negative; interest expenses
d.
negative; gross profit
64. U.S. based Majestic Co. sells products to U.S. consumers and purchases all of its materials from U.S. suppliers. Its
main competitor is located in Belgium. Majestic Co. is subject to:
a.
economic exposure.
b.
translation exposure.
c.
transaction exposure.
d.
no exposure to exchange rate fluctuations.
65. Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected by each of the following, except:
a.
the interest rate in the country of the subsidiary.
b.
the proportion of business conducted by the subsidiary.
c.
its accounting method.
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
d.
the exchange rate movements of the subsidiary's currency.
66. Treck Co. expects to pay €200,000 in one month for its imports from Spain. It also expects to receive €250,000 for its
exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be
3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk
(VaR) method based on a 95 percent confidence level, what is the maximum one-month loss in dollars if the expected
percentage change of the euro during next month is −2 percent? Assume that the current spot rate of the euro (before
considering the maximum one-month loss) is $1.23.
a.
−$38,468
b.
−$21,371
c.
−$17,097
d.
−$4,274
67. Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to receive €200,000 for its
exports to Belgium in one month. Jensen estimates the standard deviation of monthly percentage changes of the euro to be
2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-
risk (VaR) method based on a 97.5 percent confidence level, what is the maximum one month loss in dollars if the
expected percentage change of the euro during next month is 2 percent? Assume that the current spot rate of the euro
(before considering the maximum one-month loss) is $1.35.
a.
−$4,303
b.
−$7,830
c.
−$5,873
d.
−$1,958
68. Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars.
Additionally, Lazer Co. has a subsidiary in South Korea that produces computers and sells them there. Lazer also has
competitors in different countries. Lazer Co. is subject to:
a.
transaction exposure.
b.
economic exposure.
c.
translation exposure.
d.
all of the above.
69. 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 ____.
a.
increase; decrease
b.
decrease; remain unchanged
c.
decrease; increase
d.
increase; remain unchanged
70. Assume that the Japanese yen is expected to depreciate substantially over the next year. A U.S.-based MNC has a
subsidiary in Japan, where its costs exceed revenues. The overall value of the MNC will ____ because of the yen's
depreciation.
a.
decrease
b.
increase
c.
remain unchanged
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
d.
A and C are possible
71. If the net inflow of one currency is about the same amount as a net outflow in another currency, the firm will benefit if
these two currencies are negatively correlated because the transaction exposure is offset.
a.
True
b.
False
72. A purely domestic firm is never exposed to exchange rate fluctuations.
a.
True
b.
False
73. An MNC’s stock valuation will not be affected by translation exposure if the MNC’s consolidated financial statements
are prepared according to the accounting rules in FASB 52.
a.
True
b.
False
74. Currency correlations are generally negative.
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
a.
True
b.
False
75. Dollar cash flows associated with two foreign inflow currencies will normally be less volatile if the standard
deviations of the individual currencies are lower.
a.
True
b.
False
76. The maximum one-day loss estimated using the value-at-risk (VaR) method is independent of the confidence level
used.
a.
True
b.
False
77. The degree to which a firm's present value of future cash flows can be influenced by exchange rate fluctuations is
referred to as transaction exposure.
a.
True
b.
False
78. Purely domestic firms are never affected by economic exposure.
a.
True
b.
False
79. Translation exposure affects an MNC's cash flows.
a.
True
b.
False
80. Since earnings can affect stock prices, many MNCs are concerned about translation exposure.
a.
True
b.
False
81. Which of the following is not true regarding currency correlations?
a.
Two highly positively correlated currencies act almost as if they are the same currency.
b.
If two inflow currencies are highly positively correlated, transaction exposure is somewhat offset.
c.
If two inflow currencies are negatively correlated, transaction exposure is somewhat offset.
d.
If two currencies, one an inflow currency and the other an outflow currency, are highly positively correlated,
transaction exposure is somewhat offset.
82. Which of the following is not true regarding economic exposure?
a.
Even purely domestic firms can be affected by economic exposure.
b.
In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows.
c.
The degree of economic exposure will likely be much greater for a firm involved in international business than
for a purely domestic firm.
d.
The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and
therefore different from what is expected.
e.
All of the above are true.
