International Finance – Final Exam (Chapter 10), 2026 – Study Material and
Practice Questions
What are the three major foreign exchange exposures experienced by firms? - correct answer
✔✔ Transaction Exposure, Operating Exposure, Translation Exposure
What is transaction exposure? - correct answer ✔✔ The risk that currency exchange rate
changes will affect the value of future payments.
How is transaction exposure defined and measured? - correct answer ✔✔ It is incurred when a
multinational corporation (MNC) agrees to make or receive payments in foreign currency.
What is operating exposure? - correct answer ✔✔ The potential financial risk or loss that occurs
through a transaction, involving money at risk in a specific market.
What is translation exposure? - correct answer ✔✔ The risk that a company's financial
statements will be negatively impacted by foreign exchange movements, which is an
accounting-based risk.
What is the purpose of hedging cash flows? - correct answer ✔✔ To protect the owner of an
asset from loss while acknowledging it eliminates potential gains.
What are the six reasons opponents of hedging provide? - correct answer ✔✔ 1. Shareholders
can diversify currency risk better than management. 2. Hedging does not increase expected
cash flows. 3. Management's hedging may not benefit shareholders. 4. Managers cannot predict
market movements. 5. Management may hedge for accounting reasons. 6. Investors may see
through accounting effects.
What are the four reasons proponents of hedging give? - correct answer ✔✔ 1. Reduces risk of
cash flows, improving planning. 2. Reduces the likelihood of cash flows falling below operational
Practice Questions
What are the three major foreign exchange exposures experienced by firms? - correct answer
✔✔ Transaction Exposure, Operating Exposure, Translation Exposure
What is transaction exposure? - correct answer ✔✔ The risk that currency exchange rate
changes will affect the value of future payments.
How is transaction exposure defined and measured? - correct answer ✔✔ It is incurred when a
multinational corporation (MNC) agrees to make or receive payments in foreign currency.
What is operating exposure? - correct answer ✔✔ The potential financial risk or loss that occurs
through a transaction, involving money at risk in a specific market.
What is translation exposure? - correct answer ✔✔ The risk that a company's financial
statements will be negatively impacted by foreign exchange movements, which is an
accounting-based risk.
What is the purpose of hedging cash flows? - correct answer ✔✔ To protect the owner of an
asset from loss while acknowledging it eliminates potential gains.
What are the six reasons opponents of hedging provide? - correct answer ✔✔ 1. Shareholders
can diversify currency risk better than management. 2. Hedging does not increase expected
cash flows. 3. Management's hedging may not benefit shareholders. 4. Managers cannot predict
market movements. 5. Management may hedge for accounting reasons. 6. Investors may see
through accounting effects.
What are the four reasons proponents of hedging give? - correct answer ✔✔ 1. Reduces risk of
cash flows, improving planning. 2. Reduces the likelihood of cash flows falling below operational
