Chapter 10—Measuring Exposure to Exchange Rate Fluctuations

1. Translation exposure reflects: a. the exposure of a firm's international contractual 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. ANS: C PTS: 1

2. Transaction exposure reflects: a. the exposure of a firm's international contractual 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. ANS: A PTS: 1

3. Economic exposure refers to: a. the exposure of a firm's international contractual 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. ANS: D PTS: 1

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. b. Yanta Co. c. the firms have about the same level of exposure. d. neither firm has any exposure. ANS: A PTS: 1

5. According to the text, currency variability levels ____ perfectly stable over time, and currency correlations ____ perfectly stable over time. a. are; are not b. are; are c. are not; are not d. are not; are

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c. exports computers to Australia invoiced in U. somewhat stable b. If the dollar strengthens. c. The present exchange rate of the Japanese yen is $. weak. purchasing foreign supplies. favorably affected c. favorably. stronger c. Inc. weaker d. A U. not. b. B and D ANS: A PTS: 1 10.012 while the present exchange rate of the British pound is $1.000. will: 2 . economic and transaction exposure. stronger b.000 yen and net outflows of 60. is a U. Which of the following operations benefit(s) from depreciation of the firm's local currency? a. weak.S. Its main competitor is located in Japan.S. weaker e. MNCs with less foreign costs than foreign revenues will be ____ affected by a ____ foreign currency. translation exposure. Generally. The yen and pound movements against the dollar are highly and positively correlated. transaction exposure. translation gains and losses are included in stockholder's equity. A and B d. b. cash outflows are ____. ANS: A PTS: 1 11. A and B ANS: C PTS: 1 7. weak. dollars. adversely affected d. b. d. Yomance Co. Vada.ANS: C PTS: 1 6. MNC has the equivalent of $1 million cash outflows in each of two highly negatively correlated currencies. economic exposure.50. During ____ dollar cycles. Vada is subject to: a. Under FASB 52: a. a. translation gains and losses are included in the reported net income.000 pounds. borrowing in a foreign country and converting the funds to the local currency prior to the depreciation. none of the above ANS: B PTS: 1 8. then Yomance Co. It has net inflows of 5. none of the above ANS: A PTS: 1 9. Yomance Co. not. investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency. favorably. has not hedged its positions. d. c.S. company that has exposure to Japanese yen and British pounds. a.

c. gross profit c.873 3 . − $5.000 for its exports to Belgium in one month. ANS: A PTS: 1 12. a. If a U. − $1.5% confidence level.303 b.9% €150. b. the appreciation of the Australian dollar has a ____ impact on the firm's ____. what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that current spot rate of the euro (before considering the maximum one-month loss) is $1.a.029) = − $5. Assume that these percentage changes are normally distributed.35 × (− 0. firm's sales in Australia are much greater than its cost of goods sold in Australia.35. be adversely affected.000 − €50.S. Jensen Co. d.5%) = − 2.873 d. because the dollar value of its yen position exceeds the dollar value of its pound position. interest expenses b. negative. negative. positive. be adversely affected. expects to pay €50. interest expenses d. benefit. − $4. because the dollar value of its yen position exceeds the dollar value of its pound position. positive.96 × 2.5 percent over the last 50 months. It also expects to receive €200. because the dollar value of its pound position exceeds the dollar value of its yen position. Using the value-at-risk (VAR) method based on a 97.000 × $1.000 in one month for its imports from France.000 Maximum one-month loss: 2% − (1.000 = €150.958 ANS: C SOLUTION: Net exposure = €200. Jensen estimates the standard deviation of monthly percentage changes of the euro to be 2. a.830 c. − $7. because the dollar value of its pound position exceeds the dollar value of its yen position. gross profit ANS: B PTS: 1 13. benefit.

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