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15-1
Module 15 International Accounting and Financial Management
Answer Key
True / False Questions
1.
One decision faced by the financial management of an IC that can be turned into an
opportunity is the choice of currency used to raise capital.
2.
The UK favors a capital structure opposite that of the U.S.
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3.
Transaction exposure or risk is a risk the customer may never take.
4.
Translation exposure or risk occurs because the currency in which business is conducted
may lose or gain value in terms of the company's home currency when financial
statements are consolidated.
5.
Trying to protect against losses due to currency exchange rate fluctuations is hedging.
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6.
A hedge involves a contract.
7.
In a forward market hedge, only a few currencies can be hedged, and you are limited to
contracts in fixed amounts of each currency that can be settled by delivery of the
currencies at only a few set dates per year.
8.
The forward market hedge is less flexible than the currency option hedge.
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9.
Microloans are hardly ever repaid, so they function as an aid to developing economies.
10.
When using a money market hedge, the hedger will hold the currency borrowed until the
day it receives payment in terms of the underlying transaction.
11.
When using a money market hedge, the hedger will immediately convert the currency
borrowed into his or her own currency.
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12.
The money market hedge is less flexible because money market vehicles are somewhat
thin in many currencies.
13.
In the forward market hedge example in the book, the exporter Nucor would deliver the
euro it receives from the Spanish importer in return for US dollars from the other party to
the forward contract. Hence, Nucor is in a covered position.
14.
An importer accelerates payment of the necessary currency exchange (leads) when she
thinks the currency will devalue in terms of the foreign payment currency.
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15.
When independent, unrelated companies use acceleration or delay of payment to each
other, such leading and lagging is generally a win-win situation.
16.
Objectives of multilateral netting include keeping as much money as is reasonably
possible in countries with high interest rates or where credit is difficult to obtain.
17.
Exposure netting is the acceptance of closed positions in two or more currencies that are
considered to balance one another.
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18.
One hedging method with exposure netting is to work with groups of currencies rather
than individual ones.
19.
Swap contracts can be used to hedge foreign currency exposure. They may be undertaken
for long periods of time.
20.
One hedging method is to use one currency considered strong and a second currency
considered weak, matching exposures.
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21.
Translation exposure and economic exposure are risks that should be avoided by the IC.
22.
Temporal method of translation would recognize market value of real estate assets.
23.
An advantage of exposure/multilateral netting is that it avoids the costs of hedging.
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24.
Transfer pricing is a term for the pricing involved when one unit of an IC buys from
another.
25.
Governments tend to ignore transfer pricing.
26.
Hedging for currency risk is only for large businesses with established international
operations.
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27.
The right to receive, or the obligation to pay, a foreign currency up to one year in the future
involves a transaction risk.
28.
The currency losses or gains that can result from translating values of assets or liabilities
and payables or receivable arising from investments abroad from one currency to another
are referred to as translation risks.
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29.
Translation risks involve shorter time periods than do transaction risks.
30.
Economic exposure is the potential for unanticipated exchange rate movements to affect
future cash flows.
Multiple Choice Questions
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31.
The financial issues confronting IC management include
32.
Currency fluctuations create risks categorized as
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33.
Transaction exposure
34.
A forward market hedge
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35.
The forward market hedge
36.
A currency option hedge
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37.
Swap contracts are used to hedge
38.
A covered position occurs when
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39.
The money market hedge
40.
Transfer pricing may be used to
15-17
41.
Swap contracts
42.
The money market hedge
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43.
The currency option hedge
44.
Leading or lagging payments
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45.
The impact of blocked funds includes
46.
Multilateral netting
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47.
The adoption of the euro has affected transaction exposure by
48.
Translation risk
