Fundamentals of Multinational Finance, 5e (Moffett et al.)
Chapter 11 Operating Exposure
Multiple Choice and True/False Questions
11.1 A Multinational’s Operating Exposure
1) Another name for operating exposure is ________ exposure.
A) economic
B) competitive
C) strategic
D) all of the above
2) Net operating exposure
A) is the gross finance exposure minus gross operating exposure.
B) is the difference between the parent company and its subsidiaries exposures.
C) is static in nature regardless of the macro-environment.
D) is the net result of all cash outflows and inflows by currency.
3) What type of international risk exposure measures the change in present value of a firm
resulting from changes in future operating cash flows caused by any unexpected change in
exchange rates?
A) transaction exposure
B) accounting exposure
C) operating exposure
D) translation exposure
4) The goal of operating exposure analysis is to identify strategic operating techniques the firm
might adopt to enhance value in the face of unanticipated exchange rate changes.
5) ________ cash flows arise from intracompany and intercompany receivables and payments
while ________ cash flows are payments for the use of loans and equity.
A) Financing; operating
B) Operating; financing
C) Operating; accounting
D) Accounting; financing
6) Operating cash flows may occur in different currencies and at different times, but financing
cash flows may occur only in a single currency.
7) Which of the following is NOT an example of a financial cash flow?
A) parent invested equity capital
B) interest on intrafirm lending
C) payment for goods and services
D) intrafirm principal payments
8) Which of the following is NOT an example of an operating cash flow?
A) management fees and distributed overhead
B) royalties and license fees
C) rent and lease payments
D) dividend paid to parent company
9) ________ exposure is far more important for the long-run health of a business than changes
caused by ________ or ________ exposure.
A) Operating; translation; transaction
B) Transaction; operating; translation
C) Accounting; translation; transaction
D) Translation; operating; transaction
10) Expected changes in foreign exchange rates should already be factored into anticipated
operating results by management and investors.
11) Under conditions of equilibrium, management would use ________ exchange rate as an
unbiased predictor of future spot rates when preparing operating budgets.
A) the current spot
B) the forward rate
C) the black market
D) none of the above
12) Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month C$100,000
contract to complete sign work in Winnipeg, Manitoba, Canada. The current spot rate is
$1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium, management would
use today ________ when preparing operating budgets.
A) $102,000
B) $101,000
C) $100,000
D) None of the above
13) The three main types of foreign exchange risk are
A) operating, transaction, and translation.
B) translation, accounting, and operating.
C) transaction, accounting, and translation.
D) operating, currency, and market.
14) Operating exposure referred to as MEDIUM RUN: EQUILIBRIUM has which of the
following set of characteristics?
A) It lasts two to five years, has complete pass-through of exchange rate changes, and existing
competitors begin partial responses.
B) It lasts for less than one year, has partial pass-through of exchange rate changes, and existing
competitors begin partial responses.
C) It lasts for more than five years, has partial pass-through of exchange rate changes, and
existing competitors begin partial responses.
D) It lasts two to five years, has partial pass-through of exchange rate changes, and existing
competitors begin partial responses.
11.2 Measuring Operating Exposure: Trident Germany
1) Operating exposure
A) creates foreign exchange accounting gains and losses.
B) causes exchange rates to fluctuate.
C) is the possibility that future cash flows will change due to an unexpected change in foreign
exchange rates.
D) measures a country’s propensity to import and export.
2) An unexpected change in exchange rates impacts a firm’s cash flows at what level(s)?
A) short run
B) medium run (equilibrium case)
C) long run
D) all of the above
3) Diversification as a strategic tool to manage operating exposure includes
A) internationalization of suppliers’ base.
B) opening new markets with localized production.
C) diversifying finance base across various capital markets and currencies.
D) All of the above
4) Which of the following is NOT an operating cash flow?
A) intra-firm payable
B) account receivable from an unrelated party
C) interest payment by a subsidiary to a parent company
D) account payable to a foreign subsidiary
11.3 Strategic Management of Operating Exposure
1) Which of the following is NOT an example of diversifying operations?
A) diversifying sales
B) diversifying location of operations
C) raising funds in more than one country
D) sourcing raw materials in more than one country
2) Which of the following is NOT an example of diversification in financing?
A) raising funds in more than one market
B) raising funds in more than one country
C) diversifying sales
D) All of the above qualify.
3) Management must be able to predict disequilibria in international markets to take advantage of
diversification strategies.
4) When disequilibria in international markets occur, management can take advantage by
A) doing nothing if they are already diversified and able to realize beneficial portfolio effects.
B) recognizing disequilibria faster than purely domestic competitors.
C) shifting operational of financing activities to take advantage of the disequilibria.
D) all of the above.
5) Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria
because
A) domestic firms lack comparative data from its own sources.
B) international firms are already so large.
C) all of the domestic firm’s raw materials are imported.
D) None of the above. Domestic firms are not at a disadvantage.
6) Which of the following is NOT an advantage of foreign exchange risk management?
A) the reduction of the variability of cash flows due to domestic business cycles
B) increased availability of capital
C) reduced cost of capital
D) All of the above are potential advantages of foreign exchange risk management.
7) The primary method by which a firm may protect itself against operating exposure impacts is
A) money market hedges.
B) diversification.
C) forward contract hedges.
D) balance sheet hedging.
8) An advantage of international diversification is the
A) reduction in the variability of future cash flows due to domestic business cycles.
B) increase in the availability of capital.
C) diversification of political risk.
D) all of the above.
9) Diversifying sources of financing, regardless of the currency of denomination, can lower a
firm’s cost of capital and increase its availability of capital.
11.4 Proactive Management of Operating Exposure
1) Which of the following is NOT identified by your authors as a proactive management
technique to reduce exposure to foreign exchange risk?
A) matching currency cash flows
B) currency swaps
C) remaining a purely domestic firm
D) parallel loans
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) Cash flow matching can be effective hedging technique when
A) the exposure cash flow is relatively constant and predictable over time.
B) it is part of the risk-sharing agreement.
C) there are no local suppliers that can accept longer term payments in their home currency.
D) all of the above
4) 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
5) The particular strategy of trying to offset 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.
6) 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.
7) 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.
8) 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.
9) 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.
10) Risk sharing agreements were especially popular during the Bratton Woods Agreement, but
lately have lost its significance in the long-term customer-supplier relationship.
11) 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
12) 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.
13) One of the main risks eliminated with Cross-Currency Swaps once compared to back-to-back
loans is
A) interest rate risk because the swap dealer locks the interest rates.
B) counterparty risk because the intermediary serves as a guarantor.
C) balance sheet risk since the swap is reported on the balance sheet as liability.
D) all of the above
14) 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.
15) 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
16) 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
17) Currency swaps are exclusively for periods of time under one year.
18) 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.
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) Which of the following is NOT one of the commonly employed financial policies used to
manage operating and transaction exposure?
A) use of natural hedges by matching currency cash flows
B) back-to-back or parallel loans
C) currency swaps
D) All of the above are commonly used financial policies for managing operating exposure.
26) Contractual approaches (i.e., options and forwards) have occasionally been used to hedge
operating exposure, but are costly and possibly ineffectual.
27) Which of the following is NOT a proactive policy for managing operating exposure?
A) matching currency of cash flow
B) back-to-back loans
C) cross currency swap agreements
D) All of the above are proactive management policies for operating exposure.
Essay Questions
11.1 A Multinational’s Operating Exposure
1) An expected change in foreign exchange rates is not included in the definition of operating
exposure, because both management and investors should have factored this information into
their evaluation of anticipated operating results and market value. Describe how the expected
change in foreign exchange rates would be reflected in the decision-making process from the
perspective of a) management, b) debt service, c) the investor, and d) the broader
macroeconomic perspective.
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11.2 Measuring Operating Exposure: Trident Germany
1) An unexpected change in exchange rates impacts a firm’s expected cash flows at four levels;
a) the short run, b) medium run: equilibrium, c) medium run: disequilibrium, and d) the long run.
Describe the impact on cash flows over each of these categories identifying the time frame for
each as well as the price changes, volume changes, and structural changes associated with each
stage.
11.3 Strategic Management of Operating Exposure
1) Diversification is possibly the best technique for reducing the problems associated with
international transactions. Provide one example each of international financial diversification and
international operational diversification and explain how the action reduces risk.
11.4 Proactive Management of Operating Exposure
1) 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