Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
1. Translation exposure reflects:
a.
the exposure of a firm’s international transactions to exchange rate fluctuations.
b.
the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c.
the exposure of a firm’s financial statements to exchange rate fluctuations.
d.
the exposure of a firm’s cash flows to exchange rate fluctuations.
2. Transaction exposure reflects:
a.
the exposure of a firm’s internationall transactions to exchange rate fluctuations.
b.
the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c.
the exposure of a firm’s financial statements to exchange rate fluctuations.
d.
the exposure of a firm’s cash flows to exchange rate fluctuations.
3. Economic exposure refers to:
a.
the exposure of a firm’s international transactions to exchange rate fluctuations.
b.
the exposure of a firm’s local currency value to transactions between foreign exchange traders.
c.
the exposure of a firm’s financial statements to exchange rate fluctuations.
d.
the exposure of a firm’s cash flows to exchange rate fluctuations.
e.
the exposure of a country’s economy (specifically GNP) to exchange rate fluctuations.
4. Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two currencies
are highly correlated in their movements against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net
cash flows in these currencies as Diz Co. except that its euros represent net cash outflows. Which firm has a higher
exposure to exchange rate risk?
a.
Diz Co.
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
b.
Yanta Co.
c.
The firms have about the same level of exposure.
d.
Neither firm has any exposure.
5. Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two
currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has
the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has
a high exposure to exchange rate risk?
a.
Jacko Co.
b.
Kriner Co.
c.
The firms have about the same level of exposure.
d.
Neither firm has any exposure.
6. According to the text, currency volatility levels ____ perfectly stable over time, and currency correlations ____
perfectly stable over time.
a.
b.
c.
d.
7. Which of the following operations benefits from appreciation of the firm’s local currency?
a.
borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.
b.
receiving earnings dividends from foreign subsidiaries
c.
purchasing supplies locally rather than overseas
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
d.
exporting to foreign countries
8. Which of the following operations benefit(s) from depreciation of the firm’s local currency?
a.
borrowing in a foreign country and converting the funds to the local currency prior to the depreciation
b.
purchasing foreign supplies
c.
investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local
currency
d.
A and B
9. Economic exposure can affect:
a.
MNCs only.
b.
purely domestic firms only.
c.
A and B
d.
none of the above
10. Under FASB 52:
a.
translation gains and losses are included in the reported net income.
b.
translation gains and losses are included in stockholder’s equity.
c.
A and B
d.
none of the above
11. Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1
million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ____ cycle, the firm is
____ affected by its exposure.
a.
strong dollar; favorably
b.
weak dollar; not
c.
strong dollar; not
d.
weak dollar; favorably
12. A U.S. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies.
During ____ dollar cycles, cash outflows are ____.
a.
weak; somewhat stable
b.
weak; favorably affected
c.
weak; adversely affected
d.
none of the above
13. Magent Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish kroner (DK). It has net inflows of
SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present
exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their
movements against the dollar. If the dollar weakens, then Magent Co. will:
a.
benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
b.
benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
c.
be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
d.
be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.
14. Generally, MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency.
a.
favorably; stronger
b.
not; stronger
c.
favorably; weaker
d.
not; weaker
e.
B and D
15. When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by translation
exposure. When the dollar weakens, the reported consolidated earnings are ____.
a.
favorably; favorably affected but by a smaller degree
b.
favorably; favorably affected by a higher degree
c.
unfavorably; favorably affected
d.
favorably; unfavorably affected
16. A firm produces products for which substitute products are produced in all countries. Appreciation of the firm’s local
currency should:
a.
increase local sales as it reduces foreign competition in local markets.
b.
increase the firm’s exports denominated in the local currency.
c.
increase the returns earned on the firm’s foreign bank deposits.
d.
increase the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.
e.
none of the above
17. A firm produces products for which substitute products are produced in all countries. Depreciation of the firm’s local
currency should:
a.
decrease local sales as foreign competition in local markets is reduced.
b.
decrease the firm’s exports denominated in the local currency.
c.
decrease the returns earned on the firm’s foreign bank deposits.
d.
decrease the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.
e.
none of the above
18. If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____
overall impact of the Swiss franc’s depreciation against the dollar on ____.
a.
positive; interest expenses
b.
positive; gross profit
c.
negative; gross profit
d.
negative; interest expenses
19. Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S.
producers of chairs. You wish to assess the relationship between the percentage change in the firm’s stock price (SPt) and
the percentage change in the peso’s value relative to the dollar (PESOt). SPt is the dependent variable. You apply the
regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your
importing volume. You should expect that the regression coefficient in the PESOt variable would be ____ in the first
subperiod and ____ in the second subperiod.
a.
negative; positive
b.
positive; positive
c.
positive; negative
d.
negative; negative
20. A set of currency cash inflows is more volatile if the correlations are low.
a.
True
b.
False
21. Which of the following is not a form of exposure to exchange rate fluctuations?
a.
transaction exposure
b.
credit exposure
c.
economic exposure
d.
translation exposure
22. The maximum one-day loss computed for the value-at-risk (VaR) method does not depend on:
a.
the expected percentage change in the currency for the next day.
b.
the standard deviation of the daily percentage changes in the currency over a previous period.
c.
the current level of interest rates.
d.
the confidence level used.
23. The maximum one-day loss computed for the value-at-risk (VaR) method does not depend on:
a.
the expected percentage change in the currency for the next day.
b.
the standard deviation of the daily percentage changes in the currency over a previous period.
c.
the current level of interest rates.
d.
the confidence level used.
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian
dollars in one month. Based on today’s spot rates, the dollar value of the funds to be received is estimated at $500,000 for
the euros and $300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard
deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The
correlation coefficient between the euro and the Canadian dollar is 0.30.
24. Refer to Exhibit 10–2. What is the portfolio standard deviation?
a.
3.00%
b.
5.44 percent
c.
17.98 percent
d.
none of the above
25. Refer to Exhibit 10–2. Assuming an expected percentage change of 0 percent for each currency during the next month,
what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the
monthly percentage changes for each currency are normally distributed.
a.
−9.00 percent
b.
−30.00 percent.
c.
−5.00 percent
d.
none of the above
26. Appreciation in a firm’s local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.
a.
reduction; reduction
b.
increase; increase
c.
increase; reduction
d.
reduction; increase
27. In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies
(denominated in foreign currencies) will likely ____ a(n) ____ local currency.
a.
be hurt by; appreciated
b.
benefit from; depreciated
c.
be hurt by; depreciated
d.
none of the above
28. The ____ the percentage of an MNC’s business conducted by its foreign subsidiaries, the ____ the percentage of a
given financial statement item that is susceptible to translation exposure.
a.
greater; smaller
b.
smaller; greater
c.
greater; greater
d.
none of the above
29. Under FASB 52, consolidated earnings are sensitive to the functional currency’s weighted average exchange rate.
a.
True
b.
False
30. If the U.S. dollar appreciates, an MNC’s:
a.
U.S. sales will probably decrease.
b.
exports denominated in U.S. dollars will probably increase.
c.
interest owed on foreign funds borrowed will probably increase.
d.
exports denominated in foreign currencies will probably increase.
e.
all of the above
31. Assume that Mill Corp., a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of
its cash flows to exchange rate movements:
PCFt = a0 + a1et +
t
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home
currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression
model estimates a coefficient of a1 of 2. This indicates that:
a.
if the foreign currency appreciates by 1%, Mill’s cash flows will decline by 2%.
b.
if the foreign currency appreciates by 1%, Mill’s cash flows will decline by .2%.
c.
if the foreign currency depreciates by 1%, Mill’s cash flows will increase by 2%.
d.
if the foreign currency depreciates by 1%, Mill’s cash flows will decline by 2%.
e.
none of the above
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
32. ____ is (are) not a determinant of translation exposure.
a.
The MNC’s degree of foreign involvement
b.
The locations of foreign subsidiaries
c.
The local (domestic) earnings of the MNC
d.
The accounting methods used
33. The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it
relates to the Australian dollar and Sudanese dinar (SDD):
PCFt = a0 + a1et +
t
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm’s home
currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression
was run over two subperiods for each of the two currencies, with the following results:
Regression Coefficient (a1)
Regression Coefficient (a1)
Currency
Earlier Subperiod
Recent Subperiod
Australian dollar (A$)
−.80
.10
Sudanese dinar (SDD)
.20
.25
Based on these results, which of the following statements is probably not true?
a.
The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod.
b.
The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent
subperiod.
c.
The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.
d.
The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.
e.
All of the above are true.
34. Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP); 25 percent of the
MNC’s funds are Taiwan dollars and 75 percent are pounds. The standard deviation of exchange movements is 7 percent
for Taiwan dollars and 5 percent for pounds. The correlation coefficient between movements in the value of the Taiwan
dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is
approximately:
a.
5.13 percent.
b.
2.63 percent.
c.
4.33 percent.
d.
5.55 percent.
35. Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL); 30 percent of the MNC’s
funds are lev and 70 percent are leu. The standard deviation of exchange movements is 10 percent for lev and 15 percent
for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this
information, the standard deviation of this two-currency portfolio is approximately:
a.
17.28 percent.
b.
13.15 percent.
c.
14.50 percent.
d.
12.04 percent.
36. One argument why exchange rate risk is irrelevant to corporations is that shareholders may be able to hedge this risk
individually.
a.
True
b.
False
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations
37. Because creditors may prefer that firms maintain low exposure to exchange rate risk, and because investors may prefer
corporations to perform hedging for them, exchange rate risk is probably relevant.
a.
True
b.
False
38. A firm’s transaction exposure in any foreign currency is based solely on the size of its open position in that currency.
a.
True
b.
False
39. Two highly negatively correlated currencies move in tandem almost as if they are the same currency.
a.
True
b.
False
40. The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
a.
True
b.
False